Model
CASE 31 BEACHSIDE HEALTH PARTNERS: Joint Venture Analysis 12/1/17
Copyright 2018 Foundation of the American College of Healthcare Executives. Not for sale.
Model with Questions, Student Version
This case considers the financial analysis of a joint venture involving both taxable and nontaxable
general partners as well as taxable limited partners. The model generates the partnership's
forecasted cash flow statements, distributions, and each participant's profitability. Note that the
model extends out to Column G. Also note that the analysis focuses on cash flows to the two
classes of equityholders.
The model consists of a complete base case analysis--no changes need to be made to the existing
MODEL-GENERATED DATA section. However, values in the INPUT DATA section of the student
spreadsheet have been replaced by zeros. Students must select appropriate input values and ente
them into the cells with values colored red. After this is done, any e
or cells will be co
ected and
the base case solution will appear. The KEY OUTPUT section includes the most important output
from the MODEL-GENERATED DATA section.
INPUT DATA: KEY OUTPUT:
Capital Contributions: XXXXXXXXXXIRR
Group $0 XXXXXXXXXXHospital ERROR:#VALUE!
Hospital 0 XXXXXXXXXXGroup ERROR:#VALUE!
Limited partners 0 XXXXXXXXXXLimited partners ERROR:#NUM!
Bank loan 0
$0 XXXXXXXXXXNPV
Capital Costs: XXXXXXXXXXHospital ERROR:#DIV/0!
XXXXXXXXXXGroup ERROR:#DIV/0!
General partners cost of equity 0.0% XXXXXXXXXXLimited partners:
Limited partners cost of equity 0.0% XXXXXXXXXXTotal $0
Bank loan rate 0.0% XXXXXXXXXXPer partner ERROR:#DIV/0!
Utilization Data:
Weeks usage per year 0
Procedures per week:
Year 1 0.0
Year 2 0.0
Year 3 0.0
Year 4 0.0
Year 5 0.0
Operating Revenue and Cost Data:
Net revenue per procedure $0
Net revenue inflation 0.0%
Supplies per procedure $0
Supplies inflation 0.0%
Technician cost per procedure $0
Clerical cost per procedure $0
Salary inflation 0.0%
Rent inflation 0.0%
Insurance inflation 0.0%
Marketing inflation 0.0%
Admin expense inflation 0.0%
Group/LP eff tax rate 0.0%
Cash Flow Distribution Data:
Initial distribution to
general partners 0.0%
Final distribution to
general partners 0.0%
MODEL-GENERATED DATA:
Loan Amortization Table:
Maximum Maximum
Interest Principal Principal Hospital Group
Year Payment Payment Payment Remaining Liability Liability
1 $0 $0 $0 $0 ERROR:#DIV/0! ERROR:#DIV/0!
2 0 0 0 0 ERROR:#DIV/0! ERROR:#DIV/0!
3 0 0 0 0 ERROR:#DIV/0! ERROR:#DIV/0!
4 0 0 0 0 ERROR:#DIV/0! ERROR:#DIV/0!
5 0 0 0 0 ERROR:#DIV/0! ERROR:#DIV/0!
Cash Flow Statements:
Year 1 Year 2 Year 3 Year 4 Year 5
Net revenues $0 $0 $0 $0 $0
Cash operating costs:
Technician support $0 $0 $0 $0 $0
Clerical support 0 0 0 0 0
Rent 15,000 15,000 15,000 15,000 15,000
Insurance 10,000 10,000 10,000 10,000 10,000
Marketing expenses 5,000 5,000 5,000 5,000 5,000
Expendable supplies 0 0 0 0 0
Service contract 50,000 50,000 75,000 75,000 100,000
Property taxes 23,000 24,000 25,000 26,000 27,000
Administrative expense 30,000 30,000 30,000 30,000 30,000
Principal repayment 0 0 0 0 0
Interest expense 0 0 0 0 0
Miscellaneous expenses 20,000 20,000 20,000 20,000 20,000
Total expenses $153,000 $154,000 $180,000 $181,000 $207,000
Partnership net CF ($153,000) ($154,000) ($180,000) ($181,000) ($207,000)
Cash Flow Distributions:
Year 1 Year 2 Year 3 Year 4 Year 5
General partners ($153,000) ($154,000) ($180,000) ($181,000) ($207,000)
Group ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Hospital ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Limited partners $0 $0 $0 $0 $0
Total distribution ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
After-Tax Profitability Analysis:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Group $0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Hospital 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Limited partners 0 0 0 0 0 0
IRR NPV
Hospital ERROR:#VALUE! ERROR:#DIV/0!
Group ERROR:#VALUE! ERROR:#DIV/0!
Limited partners ERROR:#NUM! 0
END
STANDARD DEVIATION CALCULATOR
STANDARD DEVIATION CALCULATOR
INPUT DATA:
XXXXXXXXXXNPV Probability
$0 0.0%
$0 0.0%
$0 0.0%
$0 0.0%
$0 0.0%
$0 0.0%
100.0%
KEY OUTPUT:
XXXXXXXXXXE(NPV) = $0
XXXXXXXXXXVariance = 0
XXXXXXXXXXStandard Deviation = $0
XXXXXXXXXXCoefficient of Variation = ERROR:#DIV/0!
END
Q1
Question 1
Consider the Partnership's cash flow statements.
a. Why are the debt repayments (principal and interest) included in the cash flows here but not shown in a conventional capital budgeting analysis?
. Which cash flow elements are known with relative certainty? Which ones are the most uncertain? Explain.
Q2
Question 2
Develop the Partnership's annual cash flow distributions to each partner. (Treat the limited partners as a single entity.) Apply the tax status of each partner to obtain each partner's annual after-tax cash flows.
Q3
Question 3
Find the IRR on each partner's investment.
Q4
Question 4
a. Qualitatively discuss the relative riskiness of the cash flow streams to (1) the bank, (2) the general partners, and (3) the limited partners.
. Quantitatively assess the risks facing the group, the hospital, and the limited partners. (Hint: Because of the unusual methodology for distributing the cash flows, sensitivity analysis is not very useful, so a scenario analysis is probably most appropriate. Also, because of non-normal cash flows, the IRR is not very useful. Therefore, it might be best to use an a
itrary discount rate—say, 10 percent—and focus on NPV.)
Q5
Question 5
Using the data in the case, along with your best estimates for the risks facing the general and limited partners, assign capital (equity) cost rates to these parties.
Q6
Question 6
Are there potential benefits to any of the partners that are not reflected in the cash flow distributions? Explain. Should this be of concern to any of the other partners?
Q7
Question 7
Does the partnership raise any conflict of interest or ethical issues for any of the partners? Explain.
Q8
Question 8
Summarize the potential risk
eward positions of each party, including the bank. Should each party be willing to invest in the partnership?
Q9
Question 9
Discuss the effect of the following two factors on the decision to go forward with the joint venture.
a. The ability to abandon the venture should things go sour early on
. The fact that the cash flows are truncated after five years without any attempt to estimate a terminal value
Q10
Question 10
Considering all factors, should the joint venture be formed? If you believe that the joint venture should not be formed because of inequities in distribution percentages, suggest any changes to the partnership agreement that you believe to be necessary to induce participation. Also, in making your final recommendation, think very seriously about the difference between objective risk and subjective risk.
Q11
Question 11
In your opinion, what are three key learning points from this case?
BEACHSIDE HOSPITAL IS a 320-bed, acute care, not-for-profit hospital
located in Myrtle Beach, South Carolina. It is well known as a leader in
new technology and hence draws patients from as far away as Georgetown,
South Carolina, to the south and Wilmington, North Carolina, to the north.
Beachside contracts with the Grand Strand Radiology Group to provide
adiology services for its patients. Basically, Beachside furnishes the radiology
equipment and technicians and performs the tests, while the Grand Strand
physicians read the results. Because Grand Strand bills patients separately for
the readings, there is no direct payment from Beachside to Grand Strand.
At the end of a monthly medical staff meeting, Dr. George Brigham,
president of Grand Strand, presented a proposal to Mary Cohen, Beach-
side's CEO. Grand Strand wants to form a partnership with Beachside to
provide renal diagnostic and treatment services, primarily lithotripsy and
ureteroscopy:
Lithotripsy uses a lithotripter, equipment that sends high-energy
shock waves, guided by X-ray or ultrasound, to
eak up stones
in the kidney, bladder, or ureter (duct connecting the kidneys and
the bladder). During the procedure, patients lie on a water-filled
cushion placed on the examination table and are given general
anesthesia to keep them asleep and pain free. Shock or sound
waves shatter the stones into pieces small enough to pass out of
the body in urine. This procedure takes about 45 minutes to 1
hour (https:llmedlineplus.gov/ency/artic1e/007113.htm).
© Foundation of ACHE, 2018. Reproduction without permission is prohibited . 211
212 Gapenski's Cases in Healthcare Finance
• Ureteroscopy uses a ureteroscope, a long, thin device attached to
a tiny light and camera to inspect the ureter for abnormalities.
This tool also ca
ies tiny instruments that remove or
eak
up kidney stones or stents that aid in passing kidney stones
or urine. General anesthesia is administered to patients before
the procedure, which usually takes about an hour (https:11
medlineplus.gov/encylarticlel007593.htm).
In total, the capital cost of the lithotripter and ureteroscope is approximately
$1 million.
The idea of a partnership with Grand Strand, even ifit lasts for only two
years, appeals to Mary. First, by offering lithotripsy and ureteroscopy; Beachside
is reinforcing its position as the regional leader in renal health. Second, the
partnership would position Beachside as the leading provider in the competi-
tive Myrtle Beach market. Mary believes Beachside's board of trustees would
not be willing to bear the entire risk of the equipment purchase but might
e willing to go along with a joint venture. Thus, she asked Dr. Brigham to
look into the matter further and develop a specific joint venture proposal.
Mary had almost forgotten the matter when, two months later, Dr.
Brigham appeared with the following joint venture proposal (exhibit 31.1
contains a summary of the proposed financing):
1. A separate business entity; Beachside Health Partners (the
Partnership), would be formed.
2. The Partnership would have two general partners: Grand Strand
and Beachside. Grand Strand would put up $300,000 in capital
and retain 60 percent management control, whereas Beachside
would furnish $200,000 in capital and obtain 40 percent control.
(Grand Strand is incorporated, but it files federal income
taxes as an S corporation. It would incorporate a subsidiary S
corporation for the sole purpose of investing in the Partnership.
S corporations pay no federal income taxes. Rather, as in a
partnership, the income is constructively prorated among the
owners and taxed as ordinary income.)
3. Twenty-five limited partnerships would be offered to local
physicians for $20,000 each