Why Does My Healthcare Project Need a Feasibility Study?

We have written several times in the past few years about the components of a financial feasibility study or a market study for healthcare organizations like hospitals and long-term care facilities. But we haven’t spent too much time discussing, “Why do I need a feasibility study report?”, or “Why do I need a market analysis or market research report?” In this post, we will discuss the need for, and use of, these tools for a proposed healthcare business venture, especially one based on new ideas.

In this Article …

• Will My Idea Work?
• What are the Potential Risks?
• Will my Projected Income Statement Support Debt Financing?
• What about Equity Financing?
• Resource Planning in a Feasibility Study
• Decision Making in the Long Term

Will my Idea Work?

One of the first questions to answer about a new project or business venture is “Will my idea work?” Parts of the answer include financial projections and marketing strategy, which are traditional components of a business plan. But there may be other less quantifiable issues to consider. One of our clients wanted to find new ways to increase the flow of dermatology specimens to a central pathology laboratory. The competitive landscape for pathology specimen processing is defined primarily as the local pathologists. Our client was looking for ways to direct specimens to a national center.

There is a shortage of physician dermatologists so one option was to encourage primary care physicians (PCPs) to contract with Physician Assistants (PAs). The PAs, specializing in dermatology, would perform assessments and obtain biopsies that would be sent to the central pathology laboratory. This required preliminary analysis of the clinical and economic benefit to appropriate stakeholders like PCPs and PAs, to institute a service in their offices. This market research had to take place before even considering the operational feasibility of the increase in pathology specimens.

If there were no initial indications that the suggested components of this type of service would interest the intermediate stakeholders, the idea would likely not work.

What are the Potential Risks?

Potential risks of a new potential business venture come in all shapes and sizes. The most obvious is the financial resources at risk in the proposed project or business venture. Financial feasibility studies can help you make informed decisions on the financial risks of your business idea. But a broader risk assessment can help decision-makers identify other obstacles to your proposed project’s success. Some areas to consider include:

• Technical feasibility. Is your particular project based on new technology that has had limited visibility to the target market? Is the new project a viable alternative to existing technology, e.g., saving costs or increasing clinical success? Is it a new clinical service that is dependent on regulatory and/or payor approval?
• Operational feasibility. Does your proposed project depend on finding appropriate facilities and/or specialized staff? Will you be able to find capable project management for the business venture? Are there external constraints like zoning laws that affect your proposed plan?
• Legal and professional feasibility. What about legal risks such as professional or civil liability – or even criminal exposure.? The landscape is littered with new products and services that did not work out as advertised, including healthcare products and services. Theranos, Inc. claimed its blood tests could diagnose cancer and other diseases from just a few drops of blood. The CEO and COO have pleaded guilty to federal wire fraud. Some new products don’t meet the tests of medical necessity or clinical effectiveness. Providers who bill federal healthcare programs face federal false claims actions.

As US attorney Jacqueline Romero said about a recent case in the Eastern District of Pennsylvania, “Before billing Medicare, providers must conduct their own due diligence, including reviewing applicable coverage determinations; they cannot blindly rely on the advice of device manufacturers, distributors, or billing companies,”

Will my Projected Income Statement Support Debt Financing?

Many entrepreneurs have a great new business idea but lack the personal resources to get their business venture off the ground. Family resources and banks are some of the sources of investment capital for a new business. But most of these sources are going to require a business plan, including a comprehensive feasibility study before committing capital. And be sure to include an executive summary of the project plan in your feasibility report. Busy people like bankers are not going to read a 100-page document to understand your proposed project. So the executive summary has to be short and sweet. Lenders participating in loans to small businesses guaranteed by the Small Business Administration (SBA) may also have specific requirements for loan terms. Loans requiring no collateral may even be available.

What about Equity Financing?

Equity financing is another potential source of financing for a new healthcare service or product. There are at least two types of equity financing

• Borrowing against the equity in a personal asset like a home (or a college fund?). When borrowing from yourself, it may seem like you don’t need the bells and whistles of a project feasibility study. But that can be when you need it most. Be at least as rigorous of yourself as you would be if it was your brother-in-law or sister-in-law coming to you with their latest “sure-fire” investment opportunity.
• Equity financing can be available via private equity or venture capital firms. Venture capitalists are typically looking to fund start-up companies with good growth prospects. Private equity firms are looking for companies with mature businesses. In either case, managers will be very interested in your feasibility analysis and financial projections. They also become your business partners in the short or long term.

Resource Planning in a Feasibility Study

When you set out to conduct a feasibility study, one of the significant sections will be the assumptions on which the financial viability will be based. Completing a realistic set of assumptions will help you plan for the day when you can actually rent space, buy equipment, and hire staff. Some important areas for assumptions include:

• What is your target market; how are you projecting the number of your potential customers?
• Who pays for your product or service? Is it something covered by federal or private health plans, and if so, how much do they pay?
• What are your project’s operating costs? Expenses like
  • staff and benefits,
  • rent or lease payments,
  • supplies and equipment,
  • purchased services such as billing and legal,
  • taxes and insurance, and interest on loans, to name just a few.

Setting out your assumptions will enable you to compile a preliminary analysis of the economic feasibility of your new service in the form of an income and expense statement

A second important financial projection is a cash flow statement. This schedule can show how fast any initial investments by any source will be used in the business and when you are projecting to break even on a cash basis.

Decision Making in the Long Term

Feasibility studies can also be useful in decision-making in the early and medium terms of your new business venture. Comparing your actual experience to your initial project plan can help you evaluate and adjust your strategies.

• It is one thing to estimate the amount of space your business will require. It is another to actually look at space which may be close, but not exactly what you are looking for.
• You may find staff member salaries are markedly different from what you proposed.
• You may find good deals on supplies or equipment you did not expect.
• Your initial marketing strategies may be much more successful than you planned, and you have to expand hours of operation to keep your customers satisfied.

Your project feasibility study does not guarantee your project’s success. However, it can go a long way towards identifying mitigation strategies and satisfying relevant stakeholders. It can help you enunciate key benefits for your product or service, and make sure the money spent is a good use of all the resources, including your sweat equity, invested in it!