(Breakeven Analysis) Fairbanks Memorial Hospital, an acute care hospital with 30
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(Breakeven Analysis)
Fairbanks Memorial Hospital, an acute care hospital with 300 beds and 160 staff physicians, is one of 75 hospitals owned and operated by Health Services of America, a for-profit, publicly owned company. Although there are two other acute care hospitals serving the same general population, Fairbanks historically has been highly profitable because of its well-appointed facilities, fine medical staff, and reputation for quality care. In addition to inpatient services, Fairbanks operates an emergency room within the hospital complex and a stand-alone walk-in clinic, the Better Care Clinic, located about two miles from the hospital.
Todd Greene, Fairbanks
Fairbanks Memorial Hospital, an acute care hospital with 300 beds and 160 staff physicians, is one of 75 hospitals owned and operated by Health Services of America, a for-profit, publicly owned company. Although there are two other acute care hospitals serving the same general population, Fairbanks historically has been highly profitable because of its well-appointed facilities, fine medical staff, and reputation for quality care. In addition to inpatient services, Fairbanks operates an emergency room within the hospital complex and a stand-alone walk-in clinic, the Better Care Clinic, located about two miles from the hospital. Todd Greene, Fairbanks??s chief executive officer (CEO), is concerned about Better Care Clinic??s financial performance. About ten years ago, all three area hospitals jumped onto the walk-in-clinic bandwagon, and within a short time, there were five such clinics scattered around the city. Now, only three are left, and none of them appears to be a big money maker. Todd wonders whether Fairbanks should continue to operate its clinic or close it down. The clinic is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle more visits??up to 60 per day. Todd has asked Jane Adams, Fairbanks??s chief financial officer, to look into the whole matter of the walk-in clinic. In their meeting, Todd stated that he visualizes two potential outcomes for the clinic: (1) the clinic could be closed or (2) the clinic could continue to operate as is. As a starting point for the analysis, Jane has collected the most recent historical financial and operating data for the clinic, which are summarized in Table 1. In assessing the historical data, Jane noted that one competing clinic had recently (December 2008) closed its doors. Furthermore, a review of several years of financial data revealed that the Fairbanks clinic does not have a pronounced seasonal utilization pattern. Next, Jane met several times with the clinic??s director. The primary purpose of the meetings was to estimate the additional costs that would have to be borne if clinic volume rose above the current January/February average level of 45 visits per day. Any incremental volume would require additional expenditures for administrative and medical supplies, estimated to be $4.00 per patient visit for medical supplies, such as tongue blades, rubber gloves, bandages, and so on, and $1.00 per patient visit for administrative supplies, such as file folders and clinical record sheets. Although the clinic has the physical capacity to handle 60 visits per day, it does not have staffing to support that volume. In fact, if the number of visits increased by 11 per day, another part-time nurse and physician would opyright 2009 Health Administration Press have to be added to the clinic??s staff. The incremental costs associated with increased volume are summarized in Table 2. Jane also learned that the building is leased on a long-term basis. Fairbanks could cancel the lease, but the lease contract calls for a cancellation penalty of three months rent, or $37,500, at the current lease rate. In addition, Jane was startled to read in the newspaper that Baptist Hospital, Fairbanks??s major competitor, had just bought the city??s largest primary care group practice, and Baptist??s CEO was quoted as saying that more group practice acquisitions are planned. Jane wondered whether Baptist??s actions should influence the decision regarding the clinic??s fate. Finally, in earlier conversations, Todd also wondered whether the clinic could ??inflate?? its way to profitability; that is, if volume remained at its current level, could the clinic be expected to become profitable in, say, five years, solely because of inflationary increases in revenues? Overall, Jane must consider all relevant factors??both quantitative and qualitative??and come up with a reasonable recommendation regarding the future of the clinic.Explanation / Answer
1. Pro forma forecasted P&L statemtent for 2009
Thus the clinics pro forma for 2009 will be same as given in Table 1 as there is no change in status quo. The clinic is not expected to make profits.
2. Assume the break even no. of patients = x
Revenue per patient = total revenues/no. of patients = 1,845/45 = $41 per patient
So revenues for "x" patients = 41x
Costs = $1,944 (as per historical data)
Assuming x-45 to be lower than 11, then there will be no incremental semi fixed costs. There will be only incremental variable costs, which will be 5x.
So, 41x = 1944+5x
or, 36x = 1944
or x = 54 patients. Thus additional visists = 54-45 = 9 patients
3. If, we apply an inflation rate of say 10% to all revenues (per unit basis and not volume as they are constant) and 10% rate to all costs, then the outcome will be:
Revenues will increase to 1,845*1.1 = 2,030
Costs will increase to 1,944*1.1 = 2,138. So loss will be $109
In other words, losses will also rise to 99*1.1 = $109
That is loss will also rise in the same proportion (here it is assumed that both revenues and costs have increased by same % i.e. 10% due to inflation and time value of money.
5. The clinic doea have a value to the hospital - it reduces the load on hospital by provoding a walk-in clinic for patients, the clinic will not operate at loss, if it operates beyond the break even point, the clinic provides more publicity to the hospital (in terms of creating awareness)
6. Going by the financials and the strategic point of view (intrinsic benefits to the hospital from the clinic). the hospital should continue to run the clinic.
Particulars Daily average (in $) for 2009 Net Revenue 1,845 Salaries and wages 451 Physician fee 600 Malpractice insurance 107 General insurance 28 Utilities 36 Equipment lease 5 Building lease 417 Other operating exp 300 Net income/(loss) (99)Related Questions
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