Case Study 1

Topics: Net present value, Positron emission tomography, Weighted average cost of capital Pages: 5 (2130 words) Published: December 6, 2014
Case Study #1: Green Valley Medical
1-Green Valley Medical Center is a nonprofit teaching hospital affiliated with a large state university and had grown since its foundation in the 1930s with continuous support from state revenues. Since it is a nonprofit organization its main goal is not to create profit for the investors, but to reach their institutional goals, which in this case is to offer good service for the region it is located in and to train the students that attend to the state university that the medical center is affiliated with. 2-The current capital budgeting process begins in each service area, where individuals submit their requests to the department head. Capital requests are classified in two different ways, what is over a $ 1000 and what is below. The latter is included as operating expenses by department. Once department heads receive all the new requests they review them, ranked them and requests not deemed necessary by the department get dropped from the list. After the department heads have their lists for their departments ready, they submit these lists to fiscal affairs where the lists are consolidated to form a final master list. The master list is then reviewed and approved by the board of trustees. The aforementioned seems like a bureaucratic system, that in paper sounds reliable, but since we are humans, we are victims of some behavioral biases that in this case might affect the evaluation of what projects the board of trustees approves. While, reading the case it is mentioned that the general practice of the board of trustees and of the previous CFO was to give high priority to medical equipment and tended to forget about the administrative service areas. Besides giving high priority to medical equipment, there were also hierarchy problems as to which departments get this medical equipment, the departments that fill the most amount of beds, which are probably the largest ones, are more likely to get what they want, leaving the smallest departments with fewer chance to get their requests met. Other interesting thing that happened is that some chiefs carry more weight than others, so naturally these chiefs again are more likely to get what they want. Here we are seeing a big flaw, not all the projects are weighted equally against each other by benefits and costs only, but by asking, who ordered this? And how large is the department that is asking us for this. The board of trustees is probably sinning of indulgent with certain chiefs, because their works might depend on the relationships they have with them and also indulgent with the big departments. The latter I do not think is that much of a problem, if a department fills more beds then it ought to be weighted different than a department then fills less beds, just because by agreeing to the requests of the biggest department more patients are going to be benefited, which is a big concern for any medical center. Now, since this is a center that also engages in research with the local university there is a conflict of interest, some of the requests of the smaller departments might be beneficial for research that might yield some huge benefits for medicine in the future, rather than yielding immediate benefits for the patients. We also have to deal with the administrative services, these are important for the organization of the medical center and for the operations it performs. It is mentioned that physicians should also be concerned about the administrative department doesn’t because there is a possibility that the administrative service areas could deteriorate to the point that the hospital is unable to contain its costs, or that it is unable to maintain its quality, and it clearly affects everyone. Even though the main function of the hospital is to serve its patients and for that you need good equipment, the board of trustees should also be concerned about the way things are ran outside the operations room. We have a complex situation...
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