Los Reyes Hospital Risk Assessment

Risk assessment is an important tool that helps to quantify the risk associated with an investment in a certain project. According to Gapenski and Pink (2015), there are three methods to quantify risk, including sensitivity analysis, scenario analysis, and Monte Carlo simulation. The most comprehendible way to assess associated risk is sensitivity analysis, as it does not require estimation of the probability of outcomes as the scenario analysis. In order to assess if Los Reyes Hospital uses the optimal capital budget, sensitivity analysis was conducted. Table 1 below demonstrates sensitivity analysis for the organization in a chart format.

Table 1. Sensitivity Analysis

In order to understand the provided data, it is best to use graphical format of the sensitivity analysis (Kenton, 2020). The graph is provided in Figure 1 below.

According to the analysis, the budget is highly sensitive to changes to the number of expected cases and even more sensitive to expected revenue per case. Even a 5% decrease in either of the values will make the hospital lose a significant amount of money. Thus, the base level is optimal; therefore, Los Reyes Hospital uses a capital budget, which is very close to optimal (Analyst Prep, 2019).

References

Analyst Prep. (2019). Optimal capital budget. Web. 

Gapenski, L.C. & Pink, G.H. (2015). Understanding healthcare financial management (7th ed.). IL: Health Administration Press.

Kenton, W. (2020). Sensitivity analysis. Investopedia. Web.