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Hi shorthen the question to the following: The user has updated the question: User's response: FACULTY PRACTICE, INC. from book (cases in healthcare FINANCIAL RISK in finance) louis c. gapenski FACULTY PRACTICE, INC., (FPI) is a not-for-profit corporation formed by physicians in the College of iMedicine at Southeastern University. FPI, with over 600 physicians, provides the medical staff for University Hospital. In addition, FPI staffs and administers a network of 25 ambu?latory care clinics and centers at ten locations within 50 miles of the hospital. In 2009, FPI generated over $500 million in revenues from about 40,000 inpatient stays and 750,000 outpatient visits. Over 70 percent of FPI's revenues currently come from inpatient stays, but this percentage has been declining, and by 2014, over half of FPI's revenues are expected to stem from outpatient services. As im?provements are made in technology and third-party payers continue to pressure providers to cut costs, more and more inpatient services will be converted to outpatient and home care. For example, in 1999, 80 percent of FPI's ophthalmological surgeries took place in University Hospital, while in 2009, 80 percent were conducted in outpatient settings. Although FPI has traditionally provided only specialty services, in 2004 it instituted a "personal physician services" program, in which patients can receive both primary and specialty care from College of Medicine physicians. This was the first step in FPI's drive to develop an integrated delivery system, which offers a full range of patient services. Now that the system is in place, FPI is contracting with managed care plans to provide virtually all physician services required locally by plan members. Furthermore, FPI is examining the feasibility of contracting directly with employers, and hence bypassing managed care plans, but no decision has yet been made. Indeed, state insurance industry repre-sentatives expressed opposition to the idea when FPI first announced the possibility of direct contracting. The insurance industry position is that direct contracting with employers to provide a complete healthcare benefit package is an insurance function, which can be undertaken only by licensed insurance plans. As part of its continuing education program, FPI holds monthly "nonclinical grand rounds" for its physicians, in which various staff members and outside specialists conduct seminars on nonclinical top-ics of interest. As part of this series, Chris Johnson, FPIs chief financial officer, has been invited to conduct two sessions on the financial risk inherent in integrated delivery systems. His main concern is that physicians, although very sophisticated in clinical matters, have a very limited understanding of basic financial risk concepts and will not appreciate the financial issues involved in integrated delivery systems without first gaining an understanding of basic financial risk concepts. Thus, he plans to devote the entire first session to basic concepts. In preparation for the seminar, Chris developed the return distribu-tions for the five investments shown in Table 13.1. lb create the table, he first hypothesized that there could be five possible economic states for the coming year, ranging from poor to excellent. Next, he estimated the one-year returns on each investment under each state. The five invest?ments are (1) T-bills, (2) real asset investment Project A, (3) real asset investment Project B, (4) an index fund designed to proxy the returns on the Standard & Poor (S&P) 500 stock index, and (5) an equity invest?ment in FPI itself. T-bills are short-term (one-year or less maturity) U.S. Treasury debt securities; Project A is a proposed sports medicine clinic; and Project B is a Medicaid-funded project for providing family health services to an underserved area. Note that Chris developed the returns for Projects A and B and for FPI as a whole by assessing the impact of each economic state on healthcare utilization and reimbursement patterns. In addition to the returns on these alternative investments, Chris developed the following questions to use as the structure for his presen?tation. See if you can answer his questions. Table 13.1. Based solely on expected returns, which the potential investment appears best? Faculty Practice, Inc. 97 Estimated Return on Investment 1 year S&P 500 Equity in State of the Economy Probability '-Bill Project A Project B Fund FPl Poor 0.10 7.0% -8.0% 18.0% -15.0% 0.0% Below average 0.20 7.0 2.0 23.0 0.0 5.0 Average 0.40 7.0 14.0 7.0 15.0 10.0 ? Above average 0.20 7.0 25.0 -3.0 30.0 15.0 Excellent 0.10 7.0 33.0 2.0 45.0 20.0 7. Now change Table 13.1 by crossing out the state of the economy and probability columns and replacing them with Year 1, Year 2, Year 3, Year 4, and Year 5. In other words, assume that the distributions represent histori?cal returns earned on each asset in each of the last five years. a. Plot four lines on a scatter diagram (regression lines) that show the returns on the S&P 500 Fund (the market) on the x-axis and (1) T-bill returns, (2) Project A returns, (3) Project B returns, and (4) FPl returns on the y-axis. (1) What are these lines called? (2) Estimate the slope coefficient of each line. What is the slope coefficient called, and what Faculty Practice, Inc. is its significance? (If you have a calculator with statistical functions or are using a spread?sheet, use linear regression to find the slope coefficients.) (3) What is the significance of the distance be?tween the plot points and the regression line ? that is, the errors? b. Plot two lines on a different scatter diagram that show the returns on FPI (the company) on the x-axis and (1) Project A returns and (2) Project B returns on the y-axis. (1) What are these lines called? (2) Estimate the slope coefficient of each line. What is the slope coefficient called, and what is its significance? (If you have a calculator with statistical functions or are using a spread?sheet, use linear regression to find the slope coefficients.) c. If you were an individual investor who could buy any of the assets in Table 13.1, which one(s) would you buy? Why? (Hint: To help answer this ques?tion, construct a Security Market Line graph and plot the returns on each asset on the graph. Also, note that FPI is actually a not-for-profit corpora?tion, so it would be impossible to buy an equity interest in the company. For this question, assume that FPI were an investor-owned company.) d. Now assume that you are the chief executive officer of FPI and you have to decide whether to invest in Project A, Project B, or both. Which project(s) would you choose if you could accept both? If you could only accept one of the two, which would you choose? Why? (Hint: To help answer this question, construct a "Corporate Market Line" graph, which plots corporate betas rather than market betas on the x-axis, and plot the returns for each project on the graph.) 8. a. What is the market risk of each project (A and B) relative to the aggregate market risk of FPI? (ForCases in Healthcare Finance for this question, assume that FPI were an investor-owned company) No additional calculations are necessary. b. What is the corporate risk of each project (A and B) relative to the aggregate corporate risk of FPI? 9. a. What is the efficient markets hypothesis (EMH)? b. What impact does this theory have on decisions concerning investments in securities? c. Is the EMH applicable to real asset investments such as the decision of FPI to invest in Project A or Project B? d. What impact does the EMH have on corporate financing decisions? And I am only willing to pay $100.00 since there are less questions to calculate. let me know this is something you can do?,Hi I am sending the table via attachment as is better aligned. Thanks,attachment,Hi, just checking to see the status of the assignment? Thanks,Hello there, just wondering if you were able to finish the assignment. Regards, Norma,Hi, thank you for you timely response. did you also answer the following question? I could not find it in the spreadheet b. Plot two lines on a different scatter diagram that show the returns on FPI (the company) on the x-axis and (1) Project A returns and (2) Project B returns on the y-axis. (1) What are these lines called? (2) Estimate the slope coefficient of each line. What is the slope coefficient called, and what is its significance? (If you have a calculator with statistical functions or are using a spread?sheet, use linear regression to find the slope coefficients.) Is it possible you can change the name of the company to Southeastern Specialty, Inc (SSI)?,Hi, under the potential investments calculations the first two variance dont add up. it appears that there are one number off. Could you please explain? Thanks

Paper#4146 | Written in 18-Jul-2015

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