Mercy Hospital is a private hospital that serves an aging population. The hospital administrator, Donna Cost Reduction Morgan, believes that insurance companies and Medicare will move to fixed payments for specific pro- (LO 4)

cedures, which will put increasing pressure on hospitals to control costs. A common procedure performed at Mercy Hospital is hip-replacement surgery. Morgan has asked the hospital’s CFO to prepare eXcel information on the current costs of hip replacements at Mercy so that they can explore the financial viability of this (and other) procedures. Consider the following information gathered by the CFO: mhhe.com/hilton4e Expected charge reimbursement (sales price) ............0::ccceee $25,000 Required return on charges (return On Sal@S)* we... cece 30%

Current average cost per hip replaceMent............::cccccceeeeeees $22,000

*To cover profit goals and other support service costs.

Required

a. Are hip-replacement surgeries financially viable?

b. Across-functional team of administrators, surgeons, nurses, and support personnel analyzed the hospital’s hip-replacement procedure and estimated that, through better scheduling and postoperative care, Mercy could reduce hospital stays from an average of nine days to five days with no loss of quality of care. In fact, because elderly patients would be hospitalized for shorter periods, they would be less likely to contract respiratory infections. Improvements in the procedure can result in a reduction of the average cost of a hip replacement by $8,000. If this were accomplished, what is the expected return on charges for a hip replacement