You have been asked to help evaluate some potential changes to the orthopedic department in your hospital.

The independent orthopedic group who works in your hospital has approached the CEO with a proposal to

establish a joint venture program to perform certain procedures in an outpatient center. Currently, the hospital

performs all joint replacements on an inpatient basis, but the surgeons believe that most replacements can

safely be done as same$-$day surgery. Currently, the hospital$$s knee replacement volume, revenue and costs look

like this:

Hospital A

Total Knee Procedures$/$ year

Medicare $250$

Commercial $200$

Medicaid $50$

Current hospital reimbursement$/$case

Medicare $$15,000$

Commercial $$22,000$

Medicaid $$14,000$

Fixed Costs $$3,750,000$

Implantable device cost$/$case $$5,000$

Other variable costs$/$case $$2,500$

The orthopedic group believes that, if the reimbursement for commercial patients was reduced by $25\%,$ they

could attract another $100$ commercial cases per year. Their proposal, then, is to establish a joint venture

company that will sub$-$lease operating room time and personnel from the hospital and that all commercial cases

would run through this JV$.$ The Medicare and Medicaid cases would stay at the hospital with no change. Because

the JV is owned $50/50$ by the hospital and the surgeons, they would receive $50\%$ of any net income generated by

the JV$.$ You can figure fixed costs and implantable device costs won$$t change $($the fixed costs would be allocated

over to the JV in proportion to the total number of total knees that they do per year$).$ Because it$$s actually more

resource intensive to discharge a patient in the same day, you should figure that the $$Other variable costs$$ will

rise by $$500$ per case. The ortho group has also let you know that, should the hospital not wish to do this deal,

they will take the idea to your cross$-$town competitor. If the JV is established between your competitor and the

ortho group, your hospital would lose all of the commercial cases you currently have, but keep the Medicare and

Medicaid cases.

How will you advise your CEO? As you consider how to answer, you should construct an analysis that shows $3$

scenarios $1)$ status quo, $2)$ JV with your ortho group at your hospital and $3)$ a JV established between your

ortho group and your competitor hospital. Your analysis should show net income for the hospital for each

option.