Better Care Clinic Breakeven Case Study 1

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 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.

 

Table 1



Better Care Clinic Historical Financial Data


Daily Averages

CY


2008 Jan/Feb 2009





Number of Visits


41


45




 


 


 




Net Revenue


$1,524


$1,845




Salaries and Wages


$428


$451




Physician fees


533


600




Malpractice Insurance


87


107




Travel and Education


15


0




General Insurance


22


28




Utilities


41


36




Equipment Leases


4


5




Building Lease


400


417




Other Operating expenses


288


300




Total Operating Expenses


1818


1944




Net Profit (Loss)


($294)


($99)




 

Table 2

Better Care Clinic Incremental Cost Data

Variable Costs:





Medical Supplies


$4.00 per visit




Administrative Supplies


$1.00




Total Variable Costs


$5.00 per visit




 




Semi-fixed Costs:





Salaries and Wages


$100




Physician Fees


$267




Total daily semi-fixed costs


$367




 




Note: The
semi-fixed costs are daily costs that apply when volume increases by 11–20
visits. However, the physical capacity of the clinic is only 60 visits per day.

 

CASE REPORT ASSIGNMENT

 

Use the text book as guide and most
importantly listen to my audio recording, case report, with hints on how you
should approach your work. You are being asked to apply basic managerial
financial concepts using Breakeven Analysis. You have an opportunity to show
what you’ve learned so far in this course. I want you to carefully review each
question and if it helps use EXCEL in preparing your analysis. Please show me
all of your work including any formulas used in your analysis. I look forward
to getting your assignment for review. This case report study is a real
scenario. I hope you enjoy the journey. Good Luck!

 

Questions:

 

Using the historical data as a
guide, construct a forecasted profit and loss statement for the clinic's
average day for all of 2009 assuming the status quo. With no change in volume
(utilization), is the clinic projected to make a profit?

 

How many additional daily visits
must be generated to break even?

 

Thus far, the analysis has
considered the clinic's near-term profitability—that is, an average day in
2009. Redo the forecasted profit and loss statement developed in Question 1 for
an average day in 2014, five years hence; assuming that volume stays constant
(does not increase). (Hint: You must consider likely changes in revenues and
costs due to inflation and other factors. The idea here is to see whether the
clinic can "inflate" its way to profitability even if volume remains
at its current level).

 

Suppose you just found out that the
$3,215 monthly malpractice insurance charge is based on an accounting
allocation scheme that divides the hospital’s total annual malpractice
insurance costs by the total annual number of inpatient days and outpatient
visits to obtain a per-episode charge. Then, the per-episode value is
multiplied by each department's projected number of patient days or outpatient
visits to obtain each department's malpractice cost allocation. What impact
does this allocation scheme have on the clinic’s true (cash) profitability? (No
calculations are necessary).

 

Does the clinic have any value to
the hospital beyond that considered by the numerical analysis just conducted?
Do the actions by Baptist Hospital have any bearing on the final decision
regarding the clinic?

 

What is your final recommendation
concerning the future of the walk-in clinic?

 

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