Read the following and answer the question:
Based on Reed Hospital – Break Even Analysis, 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 clinic's director. Assess each element in the pro forma 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 clinic's director?
2. Does the clinic have any value to the hospital beyond that considered by the numerical analysis just conducted? Do the actions by Baptist Hospital have any bearing on the final decision regarding the clinic?
3. What is your final recommendation concerning the future of the walk-in clinic?
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, fine medical staff, reputation for quality, 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 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.
Patients who need immediate care for injuries or illness, be it a nail gun puncture or a sore throat, are increasingly turning to walk-in clinics (urgent care centers). These clinics aim to fill the gap between the growing shortage of primary care physicians and already crowded (and expensive) emergency departments. Walk-in clinics are staffed by physicians, offer weight times as little as a few minutes, and charge $60-$200, depending on the procedure. Furthermore, no appointments are necessary and evening and weekend hours are frequently available. Finally, copayments are typically much less than for emergency department visits. Currently, 8,000 of these clinics exist around the country, including about 1,200 affiliated with hospitals.
Mike Reynolds, Reed’s Chief Executive Officer (CEO), is concerned about the clinic’s overall financial soundness. 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 moneymaker. Mike wonders if Reed 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 many more visits – up to 85 a day. Mike’s decision has been complicated by the fact that Rose Daniels, Reed’s Marketing Director, has been pushing to embark on a new marketing program for the clinic. She believes that an expanded marketing effort aimed at local businesses would bring in the number of new patients needed to make the clinic a financial winner.
Mike has asked Brent Williams, Reed’s Chief Financial Officer, to look into the whole matter of a walk-in clinic. In their meeting, Mike stated that he visualizes three potential outcomes for the clinic: (1) the clinic could be closed; (2) the clinic could continue to operate as is – that is, without expanding its marketing program; or (3) the clinic will continue to operate, but with the expanded marketing effort. As a starting point for the analysis, Brent has collected the most recent historical financial and operating data for the clinic, which are summarized in Exhibit 6.1.

Exhibit 6.1 – Reed Walk-In Clinic: Historical Financial Data
				Monthly Averages
	CY 2009	Jan. 2010	Feb. 2010	2009	Jan/Feb 2010	Total
Number of Visits	14,522	1365	1335	1210	1350	1230
Net Revenue	$548,747	$36,028	$54,748	$45,729	$54,888	$47,037
Salaries And Wages	$154,250	$13,540	$13,544	$12,854	$13,542	$12,952
Physician Fees	192,000	18,000	18,000	16,000	18,000	18,286
Malpractice Insurance	31,440	3215	3215	2620	3215	2705
Travel And Education	5365	538	665	447	602	469
General Insurance	8112	843	843	676	843	700
Subscriptions	189	0	0	16	0	14
Electricity	11,820	1124	1029	985	1077	998
Water	1260	135	142	105	139	110
Equipment Rental	1260	105	105	105	105	105
Building Lease	155,745	12,500	12,500	12,979	12,500	12,910
Other Operating Expenses	103,779	8152	7923	8648	8038	8561
Total Operating Expenses	$665,220	$58,152	$57,966	$55,435	$58,049	$55,810
Net Profit (Loss)	($116,473)	($3124)	($3218)	($9706)	($3173)	($8773)
Gross Margin (%)	-21.2%	-5.7%	-5.9%	-21.2%	-5.8%	-18.7%

In assessing the historical data, Brent noted that one competing clinic had recently (December 2009) closed its doors. Furthermore, a review of several years of financial data revealed that the Reed clinic does not have a pronounced seasonal utilization pattern.
Next, Brent 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 usage would require additional expenditures for administrative and medical supplies, estimated to be $3 per patient visit for medical supplies, such as tongue blades and rubber gloves, and $.50 per patient visit for administrative supplies, such as file folders and clinical record sheets.
Because of the relatively low volume level, the clinic has purposely been staffed at the bare minimum. In fact, some clinic employees have started to grumble about not being able to do their jobs well because of overwork. Thus, any increase in the number of patient visits would require immediate administrative and medical staff increases. Furthermore, as the number of visits increase, the clinic would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 6.2.