Reed 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 two other acute care hospitals serve the same population, Reed historically has been highly profitable because of its well-appointed facilities, its fine medical staff, its reputation for quality care, and the amount of individual attention it gives to patients. In addition to the standard range of inpatient and outpatient services, Reed operates an emergency department (ED) within the hospital complex and a stand-alone walk-in clinic located across the street from the area’s major shopping mall, about two miles from the hospital.

According to a Wall Street Journal article, urgent care centers are increasingly visited by patients who need immediate treatment for an illness, such as the flu or sore throat, or an injury, such as a nail gun puncture. Urgent care centers are distinguished from similar types of ambulatory healthcare providers, such as Eds and retail clinics, by the scope of illnesses treated and the presence of on-site facilities. These centers help mitigate the problems of primary care physician shortages and already crowded (and typically very expensive) EDs. Urgent care centers notes the Wall Street Journal are staffed by physicians, offer short wait times, and charge between $60 and $200 per procedure. Furthermore, no appointments are necessary, and evening and weekend hours are frequently available. Finally, many centers offer discounts to the uninsured, and for those with coverage, copayments are typically less than for ED visits. Currently, 8,000 urgent care centers are in operation across the United States, including about 1,200 that are hospital affiliated.

Mike Reynolds, Reed’s Chief Executive Officer (CEO), is concerned about the urgent care center’s overall financial soundness. About ten years ago, all three area hospitals jumped onto the urgent care center bandwagon, and within a short time, there were five such centers scattered around the city. Now, only three are left, and none of them appears to be a big moneymaker. Mike wonders if Reed should continue to operate or close its urgent care center. The urgent care center currently handles a patient load of 45 visits per day, but it has the physical capacity to handle up to 85 visits a day. Mike’s decision has been complicated by the fact that Rose Daniels, Reed’s Marketing Director, has been pushing to expand the marketing program for the urgent care center. She believes that an expanded marketing effort aimed at local businesses would bring in the number of new patients needed to make the urgent care center a financial winner.

Mike has asked Brent Williams, Reed’s Chief Financial Officer, to analyze the options. In their meeting, Mike stated that he visualizes three potential outcomes for the urgent care center: (1) close it; (2) continue to operate it without expanding marketing; or (3) continue to operate it with the expanded marketing effort. As a starting point, Brent collected the most recent historical financial and operating data for the clinic, which are summarized in Exhibit 1.1. In assessing the historical data, Brent noted that one competing center had recently (December 2009) closed its doors. Furthermore, a review of several years of financial data revealed that the urgent care center does not have a pronounced seasonal utilization pattern.

Exhibit 1.1 – Reed Walk-In Clinic: Historical Financial Data

       

This case illustrates the use of volume break-even analysis to assess the financial impact of several alternative courses of action regarding a hospital’s Urgent Care Center. Because there are no capital expenditures involved in the alternatives, a discounted cash flow (NPV/IRR) analysis cannot be undertaken. answer the following questions:

1. Although you are basically satisfied with the analysis presented in the case thus far, you are concerned about the uncertainties inherent in the revenue and expense data supplied by the Urgent Care Center's director. Assess each element in the performance profit and loss statement.
   • Are any items more uncertain than the others?
   • How could uncertainty be worked into the analysis?
   • What additional information, if any, might you want to obtain from the Urgent Care Center's director?
2. Does the Urgent Care Center have any value to the hospital beyond that considered by the numerical analysis just conducted?
3. Do the actions by Baptist Hospital have any bearing on the final decision regarding the Urgent Care Center?
4. What is your final recommendation concerning the future of the Urgent Care Center?

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Exhibit 1.2- Haad Walk-in Cinic Monthly Incremental Cost Data Number of Additional Visits Per Day 1-10 11-20 21-30 31-40 VARIABLE COSTS Medical supples Administrative upples Total variable cost per visit $3 per visit 5.50par visit S3 S0 per viai SEMI FOXED COSTS Salaries and wages Physicians fees $4000 10.000 $6000 10.000 $2000 20,000 10.000 Total monthly semi faed costs $14.000 $15.000 S16.000S27.000 FIXED COSTS Marketing acsistant's salary Advertising espenses $3000 $4000 $3000 $4000 $3000 $4000 $3000 $4000 DOOES $4000 Total Monthly Fixed Cost 57000 52000 $7000 $7000 57000 The urgent care center's building is leased on a long term basis. Reed could cancel the lease but the lease contract calls for a cancellation penalty of three month's rent (S37,500) at the current lease rate. In addition, Brent was startled to read in the newspaper that Baptist Hospital, Reed's major competitor, had just bought the city's largest primany care practice, and Baptist's CEO was quoted as saying that more group practice acquisitions are planned as the hospital moves to embrace healthcare reform. Brent wondered whether Baptist's actions would influence the decision regarding the urgent care center's fate Finally, Brent met with Rose (Reed's Marketing Director) to leam more about the proposed marketing expansion. The primary focus of the expansion would be on occupational health services (OHS). OHS involves providing medical care to empioyees of local businesses, including physital examinations, treatment of illnesses that occur during work hours; and treatment of work related injuries, especially those cavered by workers compensation. Some of the urgent care center's business is already OHS reiated, but Rose beleves that a strong marketing effort, coupled with specialized OHS record keeping, could bring additional patients to the ungent care center, The proposed market expansion requires a marketing assatant who will run the effort for the OHS program. In addition, marketing would incur advertising costs for newspaper, radio, and TV ads, as well as for brachures and handouts. The incremental costs associated with marketing are also summarized in Exhibit 12. With a blank spreadsheet on his computer screen, Brent began to construct a model that would provide the information needed to help the board make a rational, financially sound decision. At first, Brent planned to conduct a standard capital budgeting analysis that focused an the Exhibit 1.2- Haad Walk-in Cinic Monthly Incremental Cost Data Number of Additional Visits Per Day 1-10 11-20 21-30 31-40 VARIABLE COSTS Medical supples Administrative upples Total variable cost per visit $3 per visit 5.50par visit S3 S0 per viai SEMI FOXED COSTS Salaries and wages Physicians fees $4000 10.000 $6000 10.000 $2000 20,000 10.000 Total monthly semi faed costs $14.000 $15.000 S16.000S27.000 FIXED COSTS Marketing acsistant's salary Advertising espenses $3000 $4000 $3000 $4000 $3000 $4000 $3000 $4000 DOOES $4000 Total Monthly Fixed Cost 57000 52000 $7000 $7000 57000 The urgent care center's building is leased on a long term basis. Reed could cancel the lease but the lease contract calls for a cancellation penalty of three month's rent (S37,500) at the current lease rate. In addition, Brent was startled to read in the newspaper that Baptist Hospital, Reed's major competitor, had just bought the city's largest primany care practice, and Baptist's CEO was quoted as saying that more group practice acquisitions are planned as the hospital moves to embrace healthcare reform. Brent wondered whether Baptist's actions would influence the decision regarding the urgent care center's fate Finally, Brent met with Rose (Reed's Marketing Director) to leam more about the proposed marketing expansion. The primary focus of the expansion would be on occupational health services (OHS). OHS involves providing medical care to empioyees of local businesses, including physital examinations, treatment of illnesses that occur during work hours; and treatment of work related injuries, especially those cavered by workers compensation. Some of the urgent care center's business is already OHS reiated, but Rose beleves that a strong marketing effort, coupled with specialized OHS record keeping, could bring additional patients to the ungent care center, The proposed market expansion requires a marketing assatant who will run the effort for the OHS program. In addition, marketing would incur advertising costs for newspaper, radio, and TV ads, as well as for brachures and handouts. The incremental costs associated with marketing are also summarized in Exhibit 12. With a blank spreadsheet on his computer screen, Brent began to construct a model that would provide the information needed to help the board make a rational, financially sound decision. At first, Brent planned to conduct a standard capital budgeting analysis that focused an the

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Answer and explanations The clinic is not expected any profits in year 2017 b There will be 9 additi... View the full answer