HLTH 8430 Week 10 Counterargument Analysis Paper Example

The Case Against Consolidation: Pricing the Objections to the Core Laboratory Proposal

Student Name

Walden University

HLTH 8430: Healthcare Financial Management

Instructor Name

Month Day, Year

The Case Against Consolidation: Pricing the Objections to the Core Laboratory Proposal

Introduction

The Week 7 proposal asked the finance committee to merge routine testing from both of Harmon Valley Health's laboratories onto one automated line at the flagship, leaving only urgent testing at the smaller campus. Its discounted value came to roughly $7.9 million in the base case and $0.9 million with conservative volume. This brief builds the best case for keeping two full laboratories. Writing it is uncomfortable for the author of the original proposal, which is the reason to do it before the board votes rather than after. It states four objections at their strongest, attaches an illustrative cost to each, reruns the investment analysis with those costs included and then sorts the objections into those that defeat the recommendation and those that only reshape it. All figures are illustrative.

Objection One: Turnaround

Even with a rapid-response laboratory, some tests the smaller hospital's emergency department orders as routine would now travel to the core laboratory, and results would take longer. Physicians would wait for those results before deciding to admit or discharge, lengthening emergency department stays. In a department that already boards patients at busy times, longer stays reduce the number of patients who can be treated, and some leave without being seen.

Cost: about $350,000 a year in lost emergency treatment capacity. The estimate follows the logic of time-driven costing: the added minutes per affected visit multiplied by the cost of a minute of emergency department capacity, the same approach hospitals have used to cost clinical processes (Kaplan et al., 2014). It assumes about 6,000 affected visits a year with an average added wait of about 20 minutes, and values the lost capacity at what a treated emergency visit contributes.

Objection Two: Transport

Specimens would travel about 25 miles between hospitals. Courier runs cost money, some specimens have stability limits that require processing within a set time and winter weather can delay or cancel runs. A delayed run means repeated draws, delayed results and, in the worst case, a test that must be sent out at higher cost.

Cost: about $250,000 a year beyond the courier cost already in the proposal, covering more frequent runs, stability-related redraws and a contingency for weather disruption.

Objection Three: Concentration

Two laboratories give the system redundancy. One core laboratory becomes a single point of failure: if the flagship lost power, flooded, lost its information system or saw its analyzer line fail, neither hospital would have routine testing until it was fixed or rerouted. A prudent system would need backup arrangements before relying on one site.

Cost: about $150,000 a year for a standing backup agreement with a commercial reference laboratory and expanded service contracts, plus about $600,000 one-time for a redundant analyzer at the rapid-response laboratory able to run a wider menu during an outage.

Objection Four: Outreach Revenue

Physician offices near the smaller hospital send outpatient tests to its laboratory because it is close, fast and familiar. Once routine testing moves 25 miles away, some offices may send their work to a commercial reference laboratory that offers daily courier pickup and electronic ordering. That outreach revenue is not in the Week 7 cash flows, because the proposal assumed it would stay.

Cost: about $600,000 a year in lost net outreach revenue if about a third of the smaller hospital's outreach volume moves to a competitor. This is the objection whose size is hardest to estimate; the true loss could be much smaller or larger.

Rerunning the Analysis

Table 1 reruns the Week 7 net present value at the same 7% cost of capital over ten years, adding the four objection costs to the original cash flows.

Table 1

Net Present Value With Objection Costs (Illustrative, $ Millions)

Defeating or Reshaping

With all four objections priced at their strongest, the original proposal has a negative net present value even in the base case. The recommendation as written does not survive. The question is whether a revised design does.

Three objections reshape the project rather than defeat it. Turnaround can be protected by expanding the rapid-response laboratory's menu to include the tests the emergency department most often waits for, at about $150,000 a year and $400,000 one-time, replacing the $350,000 capacity cost. Transport can be managed with a fixed courier schedule and a specimen stability protocol, reducing the added cost to about $100,000 a year. Concentration is a real cost that the system should simply accept, at $150,000 a year and $600,000 one-time, because backup is the price of consolidation.

The fourth objection, outreach revenue, is the one that could defeat the project, because its size is uncertain and the revised design can only partly reduce it. Keeping a patient service center and courier pickup for physician offices near the smaller hospital would cost about $100,000 a year and might cut the expected loss to about $250,000. With these changes, the revised design is worth roughly $1.6 million in present value terms in the base case, and falls about $5.4 million short under conservative volume.

This analysis therefore changes the recommendation in two ways. The project should proceed only in a revised form, with the expanded rapid-response menu, a courier protocol, backup arrangements and retained outreach services. And because the revised project does not earn its cost of capital under conservative volume, it should be phased, so that the part most exposed to outreach loss is committed only after evidence. Capital budgeting texts recommend this kind of staging when uncertainty is concentrated in one variable (Gapenski & Reiter, 2016), and a healthcare finance text makes the related point that projects with thin margins under conservative assumptions should be structured to limit the organization's exposure (Cleverley & Cleverley, 2018). The final recommendation in Week 11 will set out that phasing.

References

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Gapenski, L. C., & Reiter, K. L. (2016). Healthcare finance: An introduction to accounting and financial management (6th ed.). Health Administration Press.

Kaplan, R. S., Witkowski, M., Abbott, M., Guzman, A. B., Higgins, L. D., Meara, J. G., Padden, E., Shah, A. S., Waters, P., Weidemeier, M., Wertheimer, S., & Feeley, T. W. (2014). Using time-driven activity-based costing to identify value improvement opportunities in healthcare. Journal of Healthcare Management, 59(6), 399-412. https://doi.org/10.1097/00115514-201411000-00005