The Struggling Hospital has been pushed by its physicians to add an open heart surgery unit. This has always been resisted on the grounds that there was not adequate demand to make the unit financially reasonable.

Under the DRG system, Struggling could expect to receive average reimbursement of $28,000 per open heart surgery for each of an anticipated 1 00 open heart surgeries per year. Incremental costs would be expected to be $30,000 per case, so a loss would be incurred.

However, the prestige associated with offering open heart surgery would attract new affiliations. It is expected that 10 additional general practice physicians would join the staff and that each of these 10 physicians would generate 20 patients per year, spread across a wide variety of DRGs.

Struggling has excess capacity and would welcome additional patients.

It is expected that the average DRG reimbursement for these new patients would be

$14,000. The average cost is expected to be

$13,900. The average marginal cost is expected to be $13,200. Should Struggling add open heart surgery as a loss leader?