Fairbanks Memorial Hospital, an acute care hospital with 300 beds and 160 staff physicians, is one...

  

 

 

 

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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 if 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 a 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 2012) 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 S4.00 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 prinary 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 if 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 2012 Jan/Feb13 Number of visits 41 45 Net revenue $1,524 $1,845 Salaries and wages Physician fees Malpractice insurance Travel and education General insurance Utilities 428 451 24 600 533 87 15 22 41 107 28 36 Equipment leases Building lease Other operating expenses Total operating expenses 400 288 417 300 $1,818 $1,944 Net profit (loss) (S 294) (S 99) Table 2 Better Care Clinic Incremental Cost Data Variable Costs: Medical supplies Administrative supplies Total variable costs $4.00 per visit 1.00 $5.00 per visit Semifixed Costs: Salaries and wages Physician fees Total daily semifixed costs $ 100 267 S 367 Note: The semifixed costs are daily costs that apply when volume increases by 11 visits above the current level of 45. However, the physical capacity of the clinic is only 60 visits per day. QUESTIONS 1. Using the historical data as a quide, construct a pro forma (forecasted) profit and loss statement for the clinic's average day for all of 2013 assuming the status quo. With no change in volume (utilization), is the clinic projected to make a profit? 2. How many additional daily visits must be generated to break even? 3. Thus far, the analysis has considered the clinic's near-term profitability, that is, an average day in 2013. Redo the forecasted profit and loss statement developed in Question 1 for an average day in 2018, 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 if the clinic can "inflate" its way to profitability even if volume remains at its current level.) 4. Suppose you just found out that the $3,215 monthly malpractice insurance charge is based on an accounting allocation scheme which 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.) 5. Does the clinic have any value to the hospital beyond that considered by the numerical analysis just conducted2 Do the actions by Baptist Hospitai have any bearing on the final decision regarding the clinic? 6. What is your final recommendation concerning the future o the valk-in clinic? 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 if 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 a 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 2012) 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 S4.00 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 prinary 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 if 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 2012 Jan/Feb13 Number of visits 41 45 Net revenue $1,524 $1,845 Salaries and wages Physician fees Malpractice insurance Travel and education General insurance Utilities 428 451 24 600 533 87 15 22 41 107 28 36 Equipment leases Building lease Other operating expenses Total operating expenses 400 288 417 300 $1,818 $1,944 Net profit (loss) (S 294) (S 99) Table 2 Better Care Clinic Incremental Cost Data Variable Costs: Medical supplies Administrative supplies Total variable costs $4.00 per visit 1.00 $5.00 per visit Semifixed Costs: Salaries and wages Physician fees Total daily semifixed costs $ 100 267 S 367 Note: The semifixed costs are daily costs that apply when volume increases by 11 visits above the current level of 45. However, the physical capacity of the clinic is only 60 visits per day. QUESTIONS 1. Using the historical data as a quide, construct a pro forma (forecasted) profit and loss statement for the clinic's average day for all of 2013 assuming the status quo. With no change in volume (utilization), is the clinic projected to make a profit? 2. How many additional daily visits must be generated to break even? 3. Thus far, the analysis has considered the clinic's near-term profitability, that is, an average day in 2013. Redo the forecasted profit and loss statement developed in Question 1 for an average day in 2018, 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 if the clinic can "inflate" its way to profitability even if volume remains at its current level.) 4. Suppose you just found out that the $3,215 monthly malpractice insurance charge is based on an accounting allocation scheme which 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.) 5. Does the clinic have any value to the hospital beyond that considered by the numerical analysis just conducted2 Do the actions by Baptist Hospitai have any bearing on the final decision regarding the clinic? 6. What is your final recommendation concerning the future o the valk-in clinic?

Answer rating: 100% (QA)

1 Pro forma forecasted PL statemtent for 2009 Particulars Daily average in for 2009 Net Revenue 1845 ... View the full answer