CPOM Module 19, Section 2: Business Case Development and Feasibility Analysis
MODULE 19: STRATEGIC GROWTH & SERVICE LINE EXPANSION

Section 19.2: Business Case Development and Feasibility Analysis

A masterclass in translating a clinical idea into a compelling business proposal, covering market analysis, financial pro forma development, and calculating the return on investment (ROI) to win executive approval.

SECTION 19.2

Business Case Development and Feasibility Analysis

A masterclass in translating a clinical idea into a compelling business proposal to win executive approval.

19.2.1 The “Why”: The Language of Leadership

You have successfully navigated the Opportunity Funnel. You have sifted through dozens of ideas, applied rigorous filters, and selected a high-impact, high-potential initiative. You are convinced—and you have the data to suggest—that your proposed service will improve patient care, solve a major organizational problem, and align with the hospital’s strategic goals. This conviction, however, is not enough. In the world of executive leadership, a brilliant clinical idea without a brilliant business case is just a well-intentioned hobby. It will not get funded. It will not get approved. It will not become a reality.

The business case is your primary tool of persuasion. It is the formal, written document that translates your clinical vision into the language that the C-suite understands: the language of finance, risk, and return on investment. A hospital is a mission-driven organization, but it is also a multi-million or multi-billion dollar enterprise. Every decision to allocate resources—whether it’s FTEs, capital for renovation, or IT support—is an investment decision. Your proposal is competing for those limited resources against every other department’s “good idea.” The Chief of Surgery wants a new robot, the Head of Cardiology wants a new cath lab, and you want to hire two pharmacists to launch a Transitions of Care program. Who wins? The leader who presents the most compelling, data-driven, and financially sound case for how their investment will generate the greatest value for the organization.

This section is a deep dive into the art and science of building that winning case. We will deconstruct it into its essential components, from the executive summary that grabs the reader’s attention to the financial pro forma that proves the program’s viability. Mastering this skill is non-negotiable for any aspiring pharmacy executive. It is the bridge between your clinical expertise and your ability to command resources and drive meaningful, sustainable change across the enterprise.

Retail Pharmacist Analogy: The Pitch for the Dispensing Robot

You are the pharmacy manager at a busy 24-hour retail store. Your team is overworked, stressed, and you’re seeing an uptick in dispensing errors during peak hours. You know that a dispensing robot could solve many of these problems. You can’t just go to your District Manager and say, “I want a $250,000 robot because it would be really helpful.” That’s a clinical wish. You have to make a business case.

Your proposal must translate your operational pain into a financial argument.

  • The Problem Statement: “Our current manual filling process results in an average of 2 potentially significant dispensing errors per month, and requires 3.5 technician hours per 100 prescriptions, limiting our capacity and pharmacist time for clinical activities like MTM and immunizations.”
  • The Market Analysis: “The three competing pharmacies within a 2-mile radius all have automated dispensing technology, allowing them to offer guaranteed 15-minute wait times, a service we cannot consistently match, potentially costing us market share.”
  • The Financial Pro Forma: You build a spreadsheet. You calculate the expenses: the robot’s lease cost, the service contract, the remodeling. Then you calculate the revenue and savings: the reallocation of 2.0 technician FTEs to other tasks, the increased prescription capacity allowing you to fill 150 more scripts per day, the projected revenue from 20 new MTM cases per month that a pharmacist can now perform, and the cost avoidance from preventing two dispensing errors per month.
  • The ROI Calculation: You do the math. You show that despite the high upfront cost, the robot will generate enough savings and new revenue to pay for itself in 2.5 years (the Payback Period) and will generate a 3-year Return on Investment (ROI) of 40%.

When you present this, you are no longer just a pharmacist asking for a new piece of equipment. You are a business leader presenting a data-backed investment opportunity that improves safety, increases efficiency, and grows revenue. This is the exact transformation your thinking must undergo to propose a new clinical service line in the hospital.

19.2.2 The Anatomy of a Winning Business Case

A powerful business case is a structured narrative. It tells a story that begins with a compelling problem, introduces your service as the hero, and ends with a clear picture of the clinical and financial success that will result. While the format can vary slightly between institutions, every truly effective business case contains these core, non-negotiable components.

The 8 Essential Components of a Business Case

1. Executive Summary

A one-page “movie trailer.” It summarizes the problem, the solution, the required investment, and the expected return. Many executives will only read this part.

2. Problem & Opportunity

Clearly define the pain point you are solving. Use internal data to quantify the problem’s impact (e.g., “Our HF readmission rate is costing us $1.2M in penalties annually”).

3. Market Analysis

Analyze the internal and external landscape. Who is the target population? What are competitors doing? What industry trends support this idea? Includes SWOT analysis.

4. Proposed Solution

Detail your proposed service. What will it do? Who will do it? Where will it be located? This section describes the operational model and patient workflow.

5. Financial Analysis

The heart of the proposal. The multi-year financial pro forma detailing all startup and operational costs, revenue projections, and key financial metrics (ROI, Payback Period).

6. Implementation Plan

A high-level project plan with major milestones and a timeline. Shows you’ve thought through the “how,” not just the “what.” (e.g., Phase 1: Hiring, Phase 2: IT Build, Phase 3: Go-Live).

7. Metrics & Evaluation

How will you define and measure success? List the specific Key Performance Indicators (KPIs) you will track (e.g., readmission rates, revenue captured, number of patients served).

8. Risks & Mitigation

Shows critical thinking. What could go wrong? What are the potential barriers (e.g., physician adoption, lower-than-expected volume)? How will you proactively address them?

19.2.3 Deep Dive: Market Analysis & SWOT

Before you can build a credible financial projection, you must first define and analyze the market for your proposed service. This step demonstrates that your idea is grounded in reality, not just wishful thinking. It answers the fundamental questions: Is there a real need? How big is that need? And how are we uniquely positioned to meet it?

The most powerful and widely used tool for this is the SWOT Analysis. It provides a structured framework for evaluating your initiative’s Strengths, Weaknesses, Opportunities, and Threats.

Masterclass Table: SWOT Analysis for a Proposed Transitions of Care Program

Strengths (Internal, Positive)

What internal attributes give us an advantage?

  • Highly skilled clinical pharmacy team: We have board-certified pharmacists with experience in cardiology and critical care.
  • Existing outpatient pharmacy: We have the physical infrastructure and licenses needed for a meds-to-beds component.
  • Strong relationship with Cardiology: Our current inpatient pharmacists are well-respected by the cardiology medical staff.
  • Access to EMR data: We can easily identify eligible patients and track outcomes through our integrated electronic medical record.

Weaknesses (Internal, Negative)

What internal attributes put us at a disadvantage?

  • Current staffing model: Our inpatient pharmacists are already at full capacity; this service will require new, dedicated FTEs.
  • Outpatient pharmacy hours: Our outpatient pharmacy is not open on weekends, which could be a barrier for Friday discharges.
  • Lack of a patient follow-up system: We do not currently have a robust, standardized process for making and tracking post-discharge phone calls.
  • Limited budget for new technology: Any software needed for patient management will face high scrutiny.

Opportunities (External, Positive)

What external factors could this program capitalize on?

  • CMS penalties: The hospital is facing significant, ongoing financial penalties for HF readmissions, creating a strong C-suite incentive to invest in a solution.
  • Value-based contracts: Our health system is entering into more at-risk contracts with payers, where we are rewarded for reducing total cost of care.
  • Lack of competition: No other hospital in our primary service area offers a comprehensive, pharmacist-led TOC program. This could be a market differentiator.
  • New high-impact medications: The growing use of SGLT2 inhibitors and ARNIs in HF provides a clear target for medication access and adherence interventions.

Threats (External, Negative)

What external factors could undermine this program?

  • Payer clawbacks (DIR fees): If the meds-to-beds component is highly successful, DIR fees from PBMs could erode the pharmacy’s prescription margin.
  • Patient choice: Patients may still choose to use their existing mail-order or community pharmacy, limiting meds-to-beds capture rate.
  • Physician resistance: Outpatient cardiologists may view the program as interfering with their patient relationships if not engaged properly.
  • Economic downturn: A hospital-wide budget freeze could halt the approval of new FTEs, killing the project before it starts.

19.2.4 Masterclass: Building the Financial Pro Forma

This is the most intimidating, and most important, part of the business case. The financial pro forma is a multi-year forecast of your proposed service’s expenses and revenues. It is your attempt to model the financial future of your program. While you don’t need to be a CPA, you do need to be meticulous, realistic, and transparent in your assumptions. Your goal is to create a credible, defensible financial story that the CFO will believe. A pro forma is typically built in Excel and presented over a 3- to 5-year period.

Step 1: Projecting Expenses

You must account for every single resource your new service will consume. It’s critical to partner with other departments (HR for salary/benefit data, IT for software quotes, Facilities for renovation estimates) to get real numbers.

EXPENSES
Category Key Components & Pharmacist “Gotchas”
Capital & One-Time Startup Costs These are the initial, upfront investments needed to get the program off the ground.
  • Space & Renovation: Does the program need a dedicated office? A cleanroom? A patient counseling room? Get a square-footage cost estimate from Facilities.
  • IT & Equipment: Computers, printers, specialized software (e.g., for patient management or MTM documentation), automated dispensing cabinets, refrigerators.
  • Initial Staff Training: Cost for external certification programs (e.g., CDE, BCPS), travel to training, or bringing in outside experts.
  • Gotcha: New leaders always underestimate these. Add a 10-15% “contingency” line item to your startup budget to account for unexpected costs.
Ongoing Operational Costs These are the recurring costs required to run the program each year.
  • Salaries, Wages & Benefits: This is almost always the largest expense. Work with HR to get a fully-loaded cost for each FTE, which includes the base salary plus the cost of benefits (typically 25-30% of salary).
  • Medications (Cost of Goods Sold – COGS): For any service that dispenses drugs (infusion, specialty, meds-to-beds), this is the acquisition cost of the drugs.
  • Supplies: IV tubing, syringes, labels, vials, office supplies.
  • Maintenance & Licensing: Annual software license fees, equipment service contracts.
  • Gotcha: Don’t forget to include an annual salary increase inflator (typically 2-3%) in your Year 2 and Year 3 projections.

Step 2: Projecting Revenue & Savings

This is where you demonstrate the value your program creates. It’s crucial to be conservative and to clearly label your assumptions. Revenue can be “hard” (cash in the door) or “soft” (cost avoidance).

REVENUE & SAVINGS
Category Key Components & Pharmacist “Gotchas”
Direct “Hard” Revenue This is new cash flow generated by the program.
  • Fee-for-Service Billing: Revenue from billing for pharmacist services like MTM, DSMT, or remote patient monitoring (if pharmacist provider status allows).
  • Dispensing Margin: For meds-to-beds or specialty pharmacy, this is the difference between the reimbursement received from the PBM and the drug’s acquisition cost (COGS).
  • Downstream Revenue: This is revenue generated for other hospital departments as a result of your program. (e.g., An ambulatory infusion center generates pharmacy revenue, but also nursing revenue and facility fees for the hospital).
  • Gotcha: Be realistic about your volume ramp-up. Don’t assume 100% capacity in Year 1. A typical projection might be 40% of target volume in Year 1, 75% in Year 2, and 100% in Year 3.
Cost Savings & Avoidance (“Soft” Revenue) This is money the hospital will not have to spend because your program exists. It’s just as valuable as hard revenue.
  • Penalty Avoidance: The calculated reduction in CMS penalties from reducing readmissions or hospital-acquired conditions. This is a highly credible and powerful number for the C-suite.
  • Drug Cost Savings: Cost reduction from a biosimilar conversion program or an antibiotic stewardship initiative.
  • Reduced Length of Stay (LOS): For example, if a PGx service reduces average LOS for depression by 1 day, and the average cost per day is $2,000, you can calculate the total cost avoidance.
  • Gotcha: Always show your math and cite your sources. (e.g., “Based on the HRRP formula, avoiding one HF readmission saves the hospital an average of $13,500. We project our program will prevent 50 readmissions in Year 1, for a total cost avoidance of $675,000.”)
Example Pro Forma: Heart Failure Transitions of Care Program (Year 1)
Year 1 Financial Pro Forma: HF TOC Program
A. STARTUP & OPERATIONAL EXPENSES
Personnel Assumes two Pharmacist FTEs and one Technician FTE. Salary is base; “fully loaded” includes ~28% benefits cost.
Pharmacist FTEs (2.0 x $140,000 base) $280,000
Technician FTE (1.0 x $55,000 base) $55,000
Benefits @ 28% of salaries $93,800
Total Personnel Costs $428,800
Other Costs
IT & Equipment (3 computers, phones) $7,500 One-time startup cost.
Marketing & Educational Materials $2,000 One-time startup cost.
TOTAL EXPENSES (Year 1) ($438,300)
B. REVENUE & COST SAVINGS
Cost Savings (Penalty Avoidance) Assumes 800 annual HF discharges, baseline readmit rate of 24%, target of 18% (6% reduction). Each readmission costs ~$13,500 in penalties. Assumes 75% program success rate in Year 1.
Target Readmission Reductions (800 x 6%) 48
Projected Reductions in Year 1 (48 x 75%) 36
Penalty Avoidance (36 x $13,500) $486,000
Direct Revenue (Meds-to-Beds) Assumes 50% patient capture rate, 4 prescriptions per patient, and a conservative net margin of $25 per prescription.
Patients Captured (800 x 50%) 400
Prescriptions Dispensed (400 x 4) 1,600
Net Margin (1,600 x $25) $40,000
TOTAL REVENUE & SAVINGS (Year 1) $526,000
C. NET FINANCIAL IMPACT (Year 1)
NET PROFIT / (LOSS) $87,700 (Total Revenue & Savings – Total Expenses)

19.2.5 Sealing the Deal: ROI, Payback, and Executive Communication

You have built a comprehensive, credible pro forma. The final step is to distill that complex spreadsheet into a few powerful, easy-to-understand metrics that will resonate with the C-suite. Executives think in terms of investment returns. Your job is to frame your proposal in those terms.

The Holy Trinity of Financial Metrics
Metric Formula What It Tells an Executive
Return on Investment (ROI) $$ROI = \frac{(\text{Net Profit})}{\text{Total Investment}} \times 100$$ “For every dollar we invest in this program, how many dollars will we get back?” An ROI of 50% means for every $1 invested, the hospital gets back $1.50 (the original $1 plus $0.50 in profit). A positive ROI is essential.
Payback Period $$ \text{Payback Period (years)} = \frac{\text{Initial Startup Investment}}{\text{Annual Net Profit}} $$ “How long will it take for this program to pay for itself?” A shorter payback period is always better. Most hospitals look for a payback period of less than 3-5 years for new programs.
Net Present Value (NPV) (Complex calculation, usually done in Excel) This is an advanced metric that impresses financial leaders. It answers the question: “What is the total value of this project’s future profits in today’s dollars?” A positive NPV means the project is a financially sound investment that will create value for the organization over time.
The Elevator Pitch to the CFO

You will almost never have time to walk an executive through your entire spreadsheet. You need a concise, powerful summary that hits the key points.

The Script: “Good morning. I’m here to propose a new pharmacist-led Transitions of Care program to address our heart failure readmission problem. We’ve identified a significant care gap at discharge that is contributing to our current $1.2 million annual CMS penalty.

“By investing $438,000 in Year 1, primarily for 3 new FTEs, our conservative projections show we can reduce HF readmissions by 36 patients, avoiding nearly $500,000 in penalties and generating $40,000 in new prescription margin.

“This results in a positive net financial impact of $87,000 in the first year alone. The program has a payback period of just under 5 years when considering only the initial startup costs against ongoing profit, and a very strong 3-year ROI. Most importantly, it directly addresses a key strategic goal and will significantly improve care for one of our most vulnerable patient populations. This is a clinically vital program that also makes excellent financial sense.”

Anticipate the Hard Questions

A good executive will challenge your assumptions. Be prepared to answer these questions:

  • “Your projections seem optimistic. What happens if your patient volume is only half of what you predict?” (Have a “conservative” and a “pessimistic” scenario modeled in your spreadsheet).
  • “Why do you need new FTEs? Can’t you do this with your existing staff?” (Be ready to show data on your current staff’s workload and why reassigning them would cause another part of the operation to fail).
  • “How do we know the reduction in readmissions will be because of your program and not some other factor?” (Explain how your KPIs are designed to isolate the program’s impact as much as possible).
  • “This is a great idea, but we have a capital freeze. Is there a lower-cost way to pilot this?” (Have a “Phase 1” or pilot version of your proposal ready, perhaps with fewer FTEs or a smaller scope, to show flexibility).