Better Care Clinic

(Breakeven Analysis)

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, Fairbankss chief executive officer (CEO), is concerned about

Better Care Clinics 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, Fairbankss 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 clinics 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 $4.00

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 clinics 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,

Fairbankss major competitor, had just bought the citys largest primary care

group practice, and Baptists CEO was quoted as saying that more group

practice acquisitions are planned. Jane wondered whether Baptists actions

should influence the decision regarding the clinics 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 $ 428 $ 451

Physician fees 533 600

Malpractice insurance 87 107

Travel and education 15 0

General insurance 22 28

Utilities 41 36

Equipment leases 4 5

Building lease 400 417

Other operating expenses 288 300

Total operating expenses $1,818 $1,944

Net profit (loss) ($ 294) ($ 99)

Table 2

Better Care Clinic

Incremental Cost Data

Variable Costs:

Medical supplies $4.00 per visit

Administrative supplies 1.00

Total variable costs $5.00 per visit

Semifixed Costs:

Salaries and wages $ 100

Physician fees 267

Total daily semifixed costs $ 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 guide, 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

hospitals 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 clinics 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 conducted? Do the actions by Baptist Hospital

have any bearing on the final decision regarding the clinic?

6. What is your final recommendation concerning the future of the walk-in

clinic?