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46 Cases in Healthcare Finance EXHIBIT 53 onsortium Employee cation and Cost Data: her Facility Services Skilled nursing facility care Current average daily cost 252 days per year per 1,000 members $650 Inpatient mental health care (50 copy Current average daily cost 644 days per your per 1,000 members 5740 Hospita-based surgery (50 copy 417 cases per year per 1,000 members Current costs $1.800 per case Emergency department care $15 cool 132 visits per year per 1,000 members Current costs $250 per visit to note Note: The emergency department cost is the total charge for oily services, some of which would be covered by the $15 TULSA MEMORIAL HOSPITAL BREAK-EVEN ANALYSIS 6 TULSA MEMORIAL HOSPITAL (TMH), 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 nine other acute care hospitals serving the same general population, TMH historically has been highly prof itable because of its well-appointed facilities, its fine medical staff, its reputation for quality care, and the amount of individual attention it gives to its patients. In addition to inpatient services. TMH operates an . : emergency department within the hospital complex and a stand-alotie urgent care center located across the street from the area's major shop- ping mall, about two miles from the hospital . According to a Wall Street Joumal article, urgent care centers are increasingly visited by patients who need immediate treatment for an illness, such as the fluor a sore throat, or an injury, such as a nail gun wound. Urgent care centers are distinguished from similar types of ambulatory healthcare providers, such as emergency departments and retail clinics, by the scope of illnesses treated and the presence of on- site facilities. These centers help mitigate the problems of primary care physician shortages and already crowded (and typically very expensive) emergency departments. Urgent care centers, notes the Wall Street Joumal article, are staffed by physicians, offer short wait times, and charge between $60 and $200 per procedure. Furthermore, no appointments are necessary and evening and weekend hours are frequently available. Finally, many centers offer discounts to the uninsured, and for those with coverage, copayments are CHAP 2014 Reproduction without permission is prohibited. 48 Cases in Healthcare Finance typically much less than for emergency department visits. There are cur rently about 9,000 of these centers around the country, including about 1,500 that are hospital affiliated. The Urgent Care Association of America has established criteria for designation as a Certified Urgent Care Center. Currently, about half of the centers in the United States have this certification. Accord ing to MedLibrary.org. "these criteria define scope of service, houts of operation, and staffing requirements. A qualifying facility must accept walk-in patients of all ages during all hours of operation. It should trcat a broad-spectrum of illnesses and injuries, and have the ability to perform minor procedures. An urgent care center must also have on site diagnostic services, including phlebotomy and x-ray." (For more information on urgent care centers, see www.icaoa.org.) In addition to certification, urgent care centers can obtain accreditation through The Joint Commission as part of its ambulatory healthcare accredits tion program. (For more information, see www.jointcommission.org) Brandon Harley, IMH'S chief executive officer, is concerned about the urgent care center's overall financial soundness. About ten years ago, several area hospitals jumped onto the urgent care center bandwagon, and within a short time, there were 15 sach centers scattered around the city. Now, only 11 are left, and none of them appears to be a big moneymaker. Brandon wonder if TMH should continue to operate its center or close it down. The center is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle many more-up to 85 visits a day. Brandon's decision is complicated by the fact that Amanda Daniels, TMH'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. Brandon has asked Nicole Williams, TMI's chief financial offi- cer, to look into the whole matter of the urgent care center. In their meeting, Brandon stated that he visualizes three potential outcomes for the center: (1) it could be closed: (2) it could continue to oper- ate as is--that is, without expanding its marketing program, of (3) it could continue to operate, accompanied by the expanded marketing cffort. As a starting point for the analysis, Nicole collected the most recent historical financial and operating data for the center, which are summarized in Exhibit 6.1. In assessing the historical data, she noted that one competing center had recently (December 2013) closed its 49 Case 6: Tulsa Memorial Hospital doors. Furthermore, a review of several years of financial data revealed that TMH's urgent care center does not have a pronounced seasonal utilization pattern Next, Nicole met several times with the center's administrative director. The primary purpose of the meetings was to estimate the addi tional costs that would have to be bore if center volume rose above the current January/February average level of 45 visits per day. Any incre- mental usage would require additional expenditures for administrative and medical supplies, estimated to be $4.00 per patient visit for medical supplies, such as tongue blades and rubber gloves, and $1.00 per patient visit for administrative supplies, such as file folders and clinical record sheets. Because of the relatively low volume level, the urgent care cen- ter has purposely been staffed at the bare minimum. In fact, some center 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 staffing increases. Furthermore, as the number of visits increase, the center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 6.2. The urgent care center's building is leased on a long-term basis. TMH could cancel the lease, but the lease contract calls for a can- celation penalty of three months' rent, or $37,500 at the current lease rate. In addition, Nicole was started to read in the newspaper that Baptist Hospital, TMil's major competitor, had just bought the city's largest primary care practice, and Baptist's CEO was quoted as say. ing that more group practice acquisitions are planned as the hospital moved to embrace healthcare reform. Nicole wondered whether Bap- tist's actions would influence the decision regarding the urgent care center's fate. Finally, Nicole met with Amanda to Icam more about the proposed marketing program. The primary focus of the new marketing program would be on occupational health services (OHS). OHS involves provid- ing medical care to local businesses, including physical examinations for managers and employees; treatment of illnesses that occur during working hours, and treatment of work-related injuries, especially those covered by workers' compensation. Although some of the clinic's cur rent business is OHS related, Amanda believes that a strong market- ing effort, coupled with specialized OHS record keeping, could bring additional patients to the clinic. The proposed marketing expansion 50 Cases in Healthcare Finance requires a marketing assistant who will run the clinic's OHS program, Additionally, the new marketing program would incur advertising costs for newspaper, radio, and IV ads as well as for brochures and handouts. The incremental costs associated with the new marketing programare also summarized in Exhibit 6.2. (To learn more about OHS, start at the American College of Occupational and Environmental Medicine website www.acoem.org.) With a blank spreadsheet on her computer screen, Nicole began to construct a model that would provide the information needed to help the board make a rational, informed decision. At first, Nicole planned to conduct a standard capital budgeting analysis that focused on the profitability of the clinic as measured by net present value or internal rate of retum. Then she realized that the expanded marketing program requires no capital investment. She also realized that no valid data are available on the incremental increase in visits that would be generated by cither an increasing population base or the expanded marketing program. Finally, she remembered that Brandon requested that the analysis consider the inherent profitability of the clinic with out the expanded marketing program. With these points in mind, Nicole thought that a breakeven analysis would be very useful in making the final decision. Specifi- cally, she wanted to develop answers to the following questions persed by Brandon: 1. What is the projected profitability of the urgent care center for the entire year if volume continues at its current level? 2. How many additional visits per day would be required to break even without the new marketing program? 3. How many additional visits per day would be required to break even assuming that the new marketing program is undertaken? 4. How many additional daily visits would the new program have to bring in to make it worthwhile, regardless of the overall profitability of the clinic? In addition, Nicole 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? Finally, Nicole was Case 6: Tulsa Memorial Hospital 51 concerned whether or not the analysis was giving the clinic full credit for its financial contributions to the hospital. She did not want to change the spreadsheet at this late date, but she did want to make sure that any additional financial value was at least considered qualitatively. Overall, Nicole must consider all relevant factors - both quantitative and qualitative and come up with a recommendation regarding the future of the urgent care center. torical Financial Data Urgent Care Center EXHIBIT 6.1 52 Monthly Averages 2014 CY 2013 Feb 2014 on 2014 Total 2013 14,522 $548,747 1,366 $55,028 1,335 $54,748 1.210 $45,729 1.350 554,888 1,230 547,037 $154,250 192.000 31.440 5,365 8.112 $13,544 18,000 3.215 $12.952 16,286 2,705 400 700 Cases in Healthcare Finance 665 189 Number of visits Net revenue Salaries and wages Physician foes Malpractice insurance Travel and education General insurance Subscriptions Electricity Water Equipment rental Bulding lease Other operating expenses Total operating expenses Net profitos Gross marin (1) $13.540 18,000 3,215 538 843 0 1.124 135 105 12.500 8,152 $58.152 $12,854 16,000 2,620 447 075 16 955 105 105 12,979 BOB $55,435 343 0 1,020 142 105 12.500 7,923 507.006 $13,542 18,000 3.215 002 343 0 1,077 130 105 12.500 8,038 $58,059 11.820 1,200 1,200 156,745 103,779 5005, 220 100 110 106 12,010 3,681 555,810 (5116,4731 (5 3.218 $ 3,124 (5 9.700 $ 8,7730 5 3.173 | -5.9% -5.7% -212% -212% - 18.7% -5.8% CY Ourent year Case 6: Tulsa Memorial Hospital 53 Number of Additional Visits per Day 1-10 11-20 21-30 31-40 0 EXHIBIT 6.2 TMH Urgent Care Center Monthly Incremental Cost Data Variable Costs Medical Supplies Administrative Supplies $4.00 per visit 1.00 per visit $5.00 per visit Total variable costs per visit Semifined Costs Salaries and wages Physician fees Total monthly samifixed costs $ 5,000 S 6,000 $ 2000 S 8.000 12,000 12.000 12.000 16,000 $17,000 $18,000 $10,000 $24,000 Fixed Costs Marketing assistant's salary Advertising expenses $ 3,000 $3,000 $3,000 $3,000 $ 3.000 4,000 4,000 4,000 4,000 4,000 Total monthly fixed costs $ 7,000 $ 7.000 $ 7.000 $ 7,000 $ 7.000 46 Cases in Healthcare Finance EXHIBIT 5.3 Consortium Employee Utilization and Cost Data: Other Facility Services Skilled nursing facility care Current average daily cost 25.2 days per year per 1,000 members $650 Inpatient mental health care ($0 copay! Current average daily cost 64.4 days per year per 1,000 members $740 Hospital-based surgery ($0 copeyi Current costs 41.7 cases per year per 1,000 members $1,800 per case Emergency department care ($15 copay) Current costs 132 visits per year per 1,000 members S250 per visit (see note) Note The emergency department cost is the total charge for facility services, some of which would be covered by the $25.oopay 100% > Tulsa MEMORIAL HOSPITAL (TMH), 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 nine other acute care hospitals serving the same general population, TMH historically has been highly prof- itable because of its well-appointed facilities, its fine medical staff, its reputation for quality care, and the amount of individual attention it gives to its patients. In addition to inpatient services, TMH operates an emergency department within the hospital complex and a stand-alone urgent care center located across the street from the area's major shop- ping mall, about two miles from the hospital. According to a Wall Street Joumal article, urgent care centers are increasingly visited by patients who need immediate treatment for an illness, such as the flu or a sore throat, or an injury, such as a nail-gun wound. Urgent care centers are distinguished from similar types of ambulatory healthcare providers, such as emergency departments and retail clinics, by the scope of illnesses treated and the presence of on- site facilities. These centers help mitigate the problems of primary care physician shortages and already crowded (and typically very expensive) emergency departments. Urgent care centers, notes the Wall Street Journal article, are staffed by physicians, offer short wait times, and charge between $60 and $200 per procedure. Furthermore, to appointments are necessary and evening and weekend hours are frequently available. Finally, many centers offer discounts to the uninsured, and for those with coverage, copavments are typically much less than for emergency department visits. There are cur rently about 9,000 of these contes around the country, including about 1.500 that are hospital affiliated. The Urgent Care Association of America has established criteria for designation as a Certified Urgent Care Center. Currently, about half of the centers in the United States have this certification. Accord- ing to MedLibrary.org, these criteria define scope of service, hours of operation, and staffing requirements. A qualifying facility must accept walk-in patients of all ages during all hours of operation. It should treat a 'broad-spectrum of illnesses and injuries, and have the ability to perform minor procedures. An urgent care center must also have on site diagnostic services, including phlebotomy and x-ray." (For more information on urgent care centers, see www.ucaoa.org.) In addition to certification, urgent care centers can obtain accreditation through The Joint Commission as part of its ambulatory healthcare accredita- tion program. {For more information, see www.jointcommission.org.) Brandon Harley, TMH's chicf executive officer, is concerned about the urgent care center's overall financial soundness. About ten years ago, several area hospitals jumped onto the urgent care center bandwagon. and within a short time, there were 15 such centers scattered around the city. Now, only 11 are left, and none of them appears to be a big moneymaker. Brandon wonder if I MH should continue to operate its center or close it down. The center is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle many more --- up to 85 visits a day. Brandon's decision is complicated by the fact that Amanda Daniels, TMH's marketing director, has been pushing to embark on a new marketing program for the clinic. She believes that an expanded marketing atout auned at local businesses would bring in the number of new patients needed to make the cline a financial winner Brandon has asked Nicole Williams, I'Mit's chief franciat offi cer, to look into the whole matter of the urgent care center. In their meeting, Brandon stated that he dializes the potential outcomes for the center i it could be closed, 2) it could continue to oper ate as is that is, without expanding its marketing program, or BER could continue to operate, accompanied by the expanded marketing effort. As starting point for the analyses, Nicole collected the most fooent historical financial and operating data for the center, which are Smare in Exhibit Ini aung the historical datase noted that one ompeting interlud cente December 2013 sed is 8 requires a marketing assistant who will run the clinien UHS program, Additionally, the new marketing program would incur advertising costs for newspaper, radio, and TV ads as well as for brochures and handouts. The incremental costs associated with the new marketing program are also summarized in Exhibit 6.2. (To learn more about OHS, start at the American College of Occupational and Environmental Medicine website, www.acoem.org.) With a blank spreadsheet on her computer screen, Nicole began to construct a model that would provide the information needed to help the board make a rational informed decision. At first, Nicole planned to conduct a standard capital budgeting analysis that focused on the profitability of the clinic as measured by nel present value or internal rate of retum. Then she realized that the expanded marketing program requires no capital investment. She also realized that no valid data are available on the incremental increase in visits that would be generated by either an increasing population base of the expanded marketing program. Finally, she remembered that Brandon requested that the analysis consider the inherent profitability of the clinic with- out the expanded marketing program, With these points in mind, Nicole thought that a break-even analysis would be very useful in making the final decision. Specific cally, she wanted to develop answers to the following questions passed by Brandon 1. What is the projected profitability of the urgent care Center for the entire year if volume contimes at als current level 2. How many Iditional visits per day would be required to break even without the new marketing program 3. How many additional visits per day would be required to break ever assuming that the new marketing Hegram is undertaken How many additional daily wit would the new program luave fo bring in to make it worthumle regardies of the overall profitability of the In additine Nicole Wordered at the clinic und intelit was to ofitability. if volume remedari terck cool the liberected to be me profitabile in active care solely at 11111111111 111 lly ease fiTuills, N; ti[ n = Can 6: Tulsa Memorial Hospital 51 concerned whether or not the analysis was giving the clinic full credit for its financial contributions to the hospital. She did not want to change the spreadsheet at this late date, but she did want to make sure that any additional financial value was at least considered qualitatively, Overall, Nicole must consider all relevant factors- both quantitative and qualitative and come up with a recommendation regarding the future of the urgent care center, istorioal Financin Date MH Urgent Care Center EXHIBIT 6.1 Monthly Averages Feb 2014 Feb 2014 2013 CY 2013 Roter Lan 2014 14.522 $548, 747 1.365 355,028 1,335 $54,748 1.210 $46,729 Nur 1.350 $54,888 1,220 $47,037 NE SIS $13,540 18,000 3.215 538 343 $12.952 16,288 2,705 489 700 14 Wat $13,544 18,000 3.215 565 843 0 1,029 142 $154.250 192.000 31.440 5.365 R 112 189 11. B20 1260 1200 156745 103,279 $665.220 Sons $13.542 18.000 3.216 602 543 0 1,077 138 105 12,500 8,038 $58,069 $12,854 16,000 2,820 447 878 16 ses 106 105 12.979 8,648 $55.435 0 1.124 135 105 12.500 8.152 $56.152 W em Budge 106 12.500 7.923 $57.966 110 105 12,910 8,561 $55.810 ge S116,4731 IS 3,124 8.7731 $ 3.2181 ($ 9.706) ($ 3,1730 187% -5,7% -212% -212S -5.9% GIO Case 6 Tula Memorial Hospital 5 Number of Additional Visits per Day 0 1-10 11-20 21-30 31-40 EXHIBIT 6.2 TMH Urgent Care Monthly Increme Cast Data Variable Costs Medical supplies Administrative supplies $4.00 per visit 1.00 per visit Total variable costs per visit $5.00 per visit Semifixed Costs Selaries and wages Physician fees $5,000 $6,000 $ 7,000 5 8,000 12.000 12.000 12,000 16.000 Total monthly seenifixed costs S 0 $17,000 $18.DOO $19.000 $24,009 Fixed Costs Marketing assistant's salary Advertising expenses $3,000 $ 3.000 $ 3.000 $3,000 $ 3.000 4.000 4.000 4.000 4.000 4,000 Total monthly fixed costs $ 7.000 $ 7,000 $2,000,000 S 7,000 doors. Furthermore, a review of several year of financial data revealed that TMH's urgent care center does not have a pronounced seasonal utilization pattern. Next, Nicole met several times with the center's administrative director. The primary purpose of the meetings was to estimate the addi- tional costs that would have to be bome if center volume rose above the current January/February average level of 45 visits per day. Any incre mental usage would require additional expenditures for administrative and medical supplies, estimated to be $4.00 per patient visit for medical supplies, such as tongue blades and rubber gloves, and $1.00 per patient visit for administrative supplies, such as file folders and clinical record sheets. Because of the relatively low volume level, the urgent care cen- ter has purposely been staffed at the bare minimum. In fact, some center 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 staffing increases. Furthermore, as the number of visits increase, the center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 6.2. The urgent care center's building is leased on a long-term basis. TMH could cancel the lease, but the lease contract calls for a can- celation peculty of three months' rent, or $37,500 at the current lease rate. In addition, Nicole was started to read in the newspaper that Baptist Hospital, TMII's major competitor, had just bought the city's largest primary care practice, and Baptist's CEO was quoted as ay ing that more group practice auquisitions are planned as the hospital moved to embrace healthcare reform. Nicole wondered whether Bap- tist's actions would influence the decision regarding the urgent care center's fate. Finally, Nicole met with Amanda to learn more about the proposed marketing program. The primary focus of the new marketing program would be on occupational health services (OHS) OHS avulves provid- ing medical care to local businesses, including physieni eximinations for managers and employees, treatment of illnesses thatoceur during working hones and treatment of work-related injuries, especially those covered by workers complemation Abough some of the clinican- ter use is ONS related Ama bebeves that a string make nie efic, coupled with specified Oils record keeping would bring aditional patinis to the time. The pressed marketing expansson 46 Cases in Healthcare Finance EXHIBIT 53 onsortium Employee cation and Cost Data: her Facility Services Skilled nursing facility care Current average daily cost 252 days per year per 1,000 members $650 Inpatient mental health care (50 copy Current average daily cost 644 days per your per 1,000 members 5740 Hospita-based surgery (50 copy 417 cases per year per 1,000 members Current costs $1.800 per case Emergency department care $15 cool 132 visits per year per 1,000 members Current costs $250 per visit to note Note: The emergency department cost is the total charge for oily services, some of which would be covered by the $15 TULSA MEMORIAL HOSPITAL BREAK-EVEN ANALYSIS 6 TULSA MEMORIAL HOSPITAL (TMH), 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 nine other acute care hospitals serving the same general population, TMH historically has been highly prof itable because of its well-appointed facilities, its fine medical staff, its reputation for quality care, and the amount of individual attention it gives to its patients. In addition to inpatient services. TMH operates an . : emergency department within the hospital complex and a stand-alotie urgent care center located across the street from the area's major shop- ping mall, about two miles from the hospital . According to a Wall Street Joumal article, urgent care centers are increasingly visited by patients who need immediate treatment for an illness, such as the fluor a sore throat, or an injury, such as a nail gun wound. Urgent care centers are distinguished from similar types of ambulatory healthcare providers, such as emergency departments and retail clinics, by the scope of illnesses treated and the presence of on- site facilities. These centers help mitigate the problems of primary care physician shortages and already crowded (and typically very expensive) emergency departments. Urgent care centers, notes the Wall Street Joumal article, are staffed by physicians, offer short wait times, and charge between $60 and $200 per procedure. Furthermore, no appointments are necessary and evening and weekend hours are frequently available. Finally, many centers offer discounts to the uninsured, and for those with coverage, copayments are CHAP 2014 Reproduction without permission is prohibited. 48 Cases in Healthcare Finance typically much less than for emergency department visits. There are cur rently about 9,000 of these centers around the country, including about 1,500 that are hospital affiliated. The Urgent Care Association of America has established criteria for designation as a Certified Urgent Care Center. Currently, about half of the centers in the United States have this certification. Accord ing to MedLibrary.org. "these criteria define scope of service, houts of operation, and staffing requirements. A qualifying facility must accept walk-in patients of all ages during all hours of operation. It should trcat a broad-spectrum of illnesses and injuries, and have the ability to perform minor procedures. An urgent care center must also have on site diagnostic services, including phlebotomy and x-ray." (For more information on urgent care centers, see www.icaoa.org.) In addition to certification, urgent care centers can obtain accreditation through The Joint Commission as part of its ambulatory healthcare accredits tion program. (For more information, see www.jointcommission.org) Brandon Harley, IMH'S chief executive officer, is concerned about the urgent care center's overall financial soundness. About ten years ago, several area hospitals jumped onto the urgent care center bandwagon, and within a short time, there were 15 sach centers scattered around the city. Now, only 11 are left, and none of them appears to be a big moneymaker. Brandon wonder if TMH should continue to operate its center or close it down. The center is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle many more-up to 85 visits a day. Brandon's decision is complicated by the fact that Amanda Daniels, TMH'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. Brandon has asked Nicole Williams, TMI's chief financial offi- cer, to look into the whole matter of the urgent care center. In their meeting, Brandon stated that he visualizes three potential outcomes for the center: (1) it could be closed: (2) it could continue to oper- ate as is--that is, without expanding its marketing program, of (3) it could continue to operate, accompanied by the expanded marketing cffort. As a starting point for the analysis, Nicole collected the most recent historical financial and operating data for the center, which are summarized in Exhibit 6.1. In assessing the historical data, she noted that one competing center had recently (December 2013) closed its 49 Case 6: Tulsa Memorial Hospital doors. Furthermore, a review of several years of financial data revealed that TMH's urgent care center does not have a pronounced seasonal utilization pattern Next, Nicole met several times with the center's administrative director. The primary purpose of the meetings was to estimate the addi tional costs that would have to be bore if center volume rose above the current January/February average level of 45 visits per day. Any incre- mental usage would require additional expenditures for administrative and medical supplies, estimated to be $4.00 per patient visit for medical supplies, such as tongue blades and rubber gloves, and $1.00 per patient visit for administrative supplies, such as file folders and clinical record sheets. Because of the relatively low volume level, the urgent care cen- ter has purposely been staffed at the bare minimum. In fact, some center 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 staffing increases. Furthermore, as the number of visits increase, the center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 6.2. The urgent care center's building is leased on a long-term basis. TMH could cancel the lease, but the lease contract calls for a can- celation penalty of three months' rent, or $37,500 at the current lease rate. In addition, Nicole was started to read in the newspaper that Baptist Hospital, TMil's major competitor, had just bought the city's largest primary care practice, and Baptist's CEO was quoted as say. ing that more group practice acquisitions are planned as the hospital moved to embrace healthcare reform. Nicole wondered whether Bap- tist's actions would influence the decision regarding the urgent care center's fate. Finally, Nicole met with Amanda to Icam more about the proposed marketing program. The primary focus of the new marketing program would be on occupational health services (OHS). OHS involves provid- ing medical care to local businesses, including physical examinations for managers and employees; treatment of illnesses that occur during working hours, and treatment of work-related injuries, especially those covered by workers' compensation. Although some of the clinic's cur rent business is OHS related, Amanda believes that a strong market- ing effort, coupled with specialized OHS record keeping, could bring additional patients to the clinic. The proposed marketing expansion 50 Cases in Healthcare Finance requires a marketing assistant who will run the clinic's OHS program, Additionally, the new marketing program would incur advertising costs for newspaper, radio, and IV ads as well as for brochures and handouts. The incremental costs associated with the new marketing programare also summarized in Exhibit 6.2. (To learn more about OHS, start at the American College of Occupational and Environmental Medicine website www.acoem.org.) With a blank spreadsheet on her computer screen, Nicole began to construct a model that would provide the information needed to help the board make a rational, informed decision. At first, Nicole planned to conduct a standard capital budgeting analysis that focused on the profitability of the clinic as measured by net present value or internal rate of retum. Then she realized that the expanded marketing program requires no capital investment. She also realized that no valid data are available on the incremental increase in visits that would be generated by cither an increasing population base or the expanded marketing program. Finally, she remembered that Brandon requested that the analysis consider the inherent profitability of the clinic with out the expanded marketing program. With these points in mind, Nicole thought that a breakeven analysis would be very useful in making the final decision. Specifi- cally, she wanted to develop answers to the following questions persed by Brandon: 1. What is the projected profitability of the urgent care center for the entire year if volume continues at its current level? 2. How many additional visits per day would be required to break even without the new marketing program? 3. How many additional visits per day would be required to break even assuming that the new marketing program is undertaken? 4. How many additional daily visits would the new program have to bring in to make it worthwhile, regardless of the overall profitability of the clinic? In addition, Nicole 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? Finally, Nicole was Case 6: Tulsa Memorial Hospital 51 concerned whether or not the analysis was giving the clinic full credit for its financial contributions to the hospital. She did not want to change the spreadsheet at this late date, but she did want to make sure that any additional financial value was at least considered qualitatively. Overall, Nicole must consider all relevant factors - both quantitative and qualitative and come up with a recommendation regarding the future of the urgent care center. torical Financial Data Urgent Care Center EXHIBIT 6.1 52 Monthly Averages 2014 CY 2013 Feb 2014 on 2014 Total 2013 14,522 $548,747 1,366 $55,028 1,335 $54,748 1.210 $45,729 1.350 554,888 1,230 547,037 $154,250 192.000 31.440 5,365 8.112 $13,544 18,000 3.215 $12.952 16,286 2,705 400 700 Cases in Healthcare Finance 665 189 Number of visits Net revenue Salaries and wages Physician foes Malpractice insurance Travel and education General insurance Subscriptions Electricity Water Equipment rental Bulding lease Other operating expenses Total operating expenses Net profitos Gross marin (1) $13.540 18,000 3,215 538 843 0 1.124 135 105 12.500 8,152 $58.152 $12,854 16,000 2,620 447 075 16 955 105 105 12,979 BOB $55,435 343 0 1,020 142 105 12.500 7,923 507.006 $13,542 18,000 3.215 002 343 0 1,077 130 105 12.500 8,038 $58,059 11.820 1,200 1,200 156,745 103,779 5005, 220 100 110 106 12,010 3,681 555,810 (5116,4731 (5 3.218 $ 3,124 (5 9.700 $ 8,7730 5 3.173 | -5.9% -5.7% -212% -212% - 18.7% -5.8% CY Ourent year Case 6: Tulsa Memorial Hospital 53 Number of Additional Visits per Day 1-10 11-20 21-30 31-40 0 EXHIBIT 6.2 TMH Urgent Care Center Monthly Incremental Cost Data Variable Costs Medical Supplies Administrative Supplies $4.00 per visit 1.00 per visit $5.00 per visit Total variable costs per visit Semifined Costs Salaries and wages Physician fees Total monthly samifixed costs $ 5,000 S 6,000 $ 2000 S 8.000 12,000 12.000 12.000 16,000 $17,000 $18,000 $10,000 $24,000 Fixed Costs Marketing assistant's salary Advertising expenses $ 3,000 $3,000 $3,000 $3,000 $ 3.000 4,000 4,000 4,000 4,000 4,000 Total monthly fixed costs $ 7,000 $ 7.000 $ 7.000 $ 7,000 $ 7.000 46 Cases in Healthcare Finance EXHIBIT 5.3 Consortium Employee Utilization and Cost Data: Other Facility Services Skilled nursing facility care Current average daily cost 25.2 days per year per 1,000 members $650 Inpatient mental health care ($0 copay! Current average daily cost 64.4 days per year per 1,000 members $740 Hospital-based surgery ($0 copeyi Current costs 41.7 cases per year per 1,000 members $1,800 per case Emergency department care ($15 copay) Current costs 132 visits per year per 1,000 members S250 per visit (see note) Note The emergency department cost is the total charge for facility services, some of which would be covered by the $25.oopay 100% > Tulsa MEMORIAL HOSPITAL (TMH), 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 nine other acute care hospitals serving the same general population, TMH historically has been highly prof- itable because of its well-appointed facilities, its fine medical staff, its reputation for quality care, and the amount of individual attention it gives to its patients. In addition to inpatient services, TMH operates an emergency department within the hospital complex and a stand-alone urgent care center located across the street from the area's major shop- ping mall, about two miles from the hospital. According to a Wall Street Joumal article, urgent care centers are increasingly visited by patients who need immediate treatment for an illness, such as the flu or a sore throat, or an injury, such as a nail-gun wound. Urgent care centers are distinguished from similar types of ambulatory healthcare providers, such as emergency departments and retail clinics, by the scope of illnesses treated and the presence of on- site facilities. These centers help mitigate the problems of primary care physician shortages and already crowded (and typically very expensive) emergency departments. Urgent care centers, notes the Wall Street Journal article, are staffed by physicians, offer short wait times, and charge between $60 and $200 per procedure. Furthermore, to appointments are necessary and evening and weekend hours are frequently available. Finally, many centers offer discounts to the uninsured, and for those with coverage, copavments are typically much less than for emergency department visits. There are cur rently about 9,000 of these contes around the country, including about 1.500 that are hospital affiliated. The Urgent Care Association of America has established criteria for designation as a Certified Urgent Care Center. Currently, about half of the centers in the United States have this certification. Accord- ing to MedLibrary.org, these criteria define scope of service, hours of operation, and staffing requirements. A qualifying facility must accept walk-in patients of all ages during all hours of operation. It should treat a 'broad-spectrum of illnesses and injuries, and have the ability to perform minor procedures. An urgent care center must also have on site diagnostic services, including phlebotomy and x-ray." (For more information on urgent care centers, see www.ucaoa.org.) In addition to certification, urgent care centers can obtain accreditation through The Joint Commission as part of its ambulatory healthcare accredita- tion program. {For more information, see www.jointcommission.org.) Brandon Harley, TMH's chicf executive officer, is concerned about the urgent care center's overall financial soundness. About ten years ago, several area hospitals jumped onto the urgent care center bandwagon. and within a short time, there were 15 such centers scattered around the city. Now, only 11 are left, and none of them appears to be a big moneymaker. Brandon wonder if I MH should continue to operate its center or close it down. The center is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle many more --- up to 85 visits a day. Brandon's decision is complicated by the fact that Amanda Daniels, TMH's marketing director, has been pushing to embark on a new marketing program for the clinic. She believes that an expanded marketing atout auned at local businesses would bring in the number of new patients needed to make the cline a financial winner Brandon has asked Nicole Williams, I'Mit's chief franciat offi cer, to look into the whole matter of the urgent care center. In their meeting, Brandon stated that he dializes the potential outcomes for the center i it could be closed, 2) it could continue to oper ate as is that is, without expanding its marketing program, or BER could continue to operate, accompanied by the expanded marketing effort. As starting point for the analyses, Nicole collected the most fooent historical financial and operating data for the center, which are Smare in Exhibit Ini aung the historical datase noted that one ompeting interlud cente December 2013 sed is 8 requires a marketing assistant who will run the clinien UHS program, Additionally, the new marketing program would incur advertising costs for newspaper, radio, and TV ads as well as for brochures and handouts. The incremental costs associated with the new marketing program are also summarized in Exhibit 6.2. (To learn more about OHS, start at the American College of Occupational and Environmental Medicine website, www.acoem.org.) With a blank spreadsheet on her computer screen, Nicole began to construct a model that would provide the information needed to help the board make a rational informed decision. At first, Nicole planned to conduct a standard capital budgeting analysis that focused on the profitability of the clinic as measured by nel present value or internal rate of retum. Then she realized that the expanded marketing program requires no capital investment. She also realized that no valid data are available on the incremental increase in visits that would be generated by either an increasing population base of the expanded marketing program. Finally, she remembered that Brandon requested that the analysis consider the inherent profitability of the clinic with- out the expanded marketing program, With these points in mind, Nicole thought that a break-even analysis would be very useful in making the final decision. Specific cally, she wanted to develop answers to the following questions passed by Brandon 1. What is the projected profitability of the urgent care Center for the entire year if volume contimes at als current level 2. How many Iditional visits per day would be required to break even without the new marketing program 3. How many additional visits per day would be required to break ever assuming that the new marketing Hegram is undertaken How many additional daily wit would the new program luave fo bring in to make it worthumle regardies of the overall profitability of the In additine Nicole Wordered at the clinic und intelit was to ofitability. if volume remedari terck cool the liberected to be me profitabile in active care solely at 11111111111 111 lly ease fiTuills, N; ti[ n = Can 6: Tulsa Memorial Hospital 51 concerned whether or not the analysis was giving the clinic full credit for its financial contributions to the hospital. She did not want to change the spreadsheet at this late date, but she did want to make sure that any additional financial value was at least considered qualitatively, Overall, Nicole must consider all relevant factors- both quantitative and qualitative and come up with a recommendation regarding the future of the urgent care center, istorioal Financin Date MH Urgent Care Center EXHIBIT 6.1 Monthly Averages Feb 2014 Feb 2014 2013 CY 2013 Roter Lan 2014 14.522 $548, 747 1.365 355,028 1,335 $54,748 1.210 $46,729 Nur 1.350 $54,888 1,220 $47,037 NE SIS $13,540 18,000 3.215 538 343 $12.952 16,288 2,705 489 700 14 Wat $13,544 18,000 3.215 565 843 0 1,029 142 $154.250 192.000 31.440 5.365 R 112 189 11. B20 1260 1200 156745 103,279 $665.220 Sons $13.542 18.000 3.216 602 543 0 1,077 138 105 12,500 8,038 $58,069 $12,854 16,000 2,820 447 878 16 ses 106 105 12.979 8,648 $55.435 0 1.124 135 105 12.500 8.152 $56.152 W em Budge 106 12.500 7.923 $57.966 110 105 12,910 8,561 $55.810 ge S116,4731 IS 3,124 8.7731 $ 3.2181 ($ 9.706) ($ 3,1730 187% -5,7% -212% -212S -5.9% GIO Case 6 Tula Memorial Hospital 5 Number of Additional Visits per Day 0 1-10 11-20 21-30 31-40 EXHIBIT 6.2 TMH Urgent Care Monthly Increme Cast Data Variable Costs Medical supplies Administrative supplies $4.00 per visit 1.00 per visit Total variable costs per visit $5.00 per visit Semifixed Costs Selaries and wages Physician fees $5,000 $6,000 $ 7,000 5 8,000 12.000 12.000 12,000 16.000 Total monthly seenifixed costs S 0 $17,000 $18.DOO $19.000 $24,009 Fixed Costs Marketing assistant's salary Advertising expenses $3,000 $ 3.000 $ 3.000 $3,000 $ 3.000 4.000 4.000 4.000 4.000 4,000 Total monthly fixed costs $ 7.000 $ 7,000 $2,000,000 S 7,000 doors. Furthermore, a review of several year of financial data revealed that TMH's urgent care center does not have a pronounced seasonal utilization pattern. Next, Nicole met several times with the center's administrative director. The primary purpose of the meetings was to estimate the addi- tional costs that would have to be bome if center volume rose above the current January/February average level of 45 visits per day. Any incre mental usage would require additional expenditures for administrative and medical supplies, estimated to be $4.00 per patient visit for medical supplies, such as tongue blades and rubber gloves, and $1.00 per patient visit for administrative supplies, such as file folders and clinical record sheets. Because of the relatively low volume level, the urgent care cen- ter has purposely been staffed at the bare minimum. In fact, some center 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 staffing increases. Furthermore, as the number of visits increase, the center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 6.2. The urgent care center's building is leased on a long-term basis. TMH could cancel the lease, but the lease contract calls for a can- celation peculty of three months' rent, or $37,500 at the current lease rate. In addition, Nicole was started to read in the newspaper that Baptist Hospital, TMII's major competitor, had just bought the city's largest primary care practice, and Baptist's CEO was quoted as ay ing that more group practice auquisitions are planned as the hospital moved to embrace healthcare reform. Nicole wondered whether Bap- tist's actions would influence the decision regarding the urgent care center's fate. Finally, Nicole met with Amanda to learn more about the proposed marketing program. The primary focus of the new marketing program would be on occupational health services (OHS) OHS avulves provid- ing medical care to local businesses, including physieni eximinations for managers and employees, treatment of illnesses thatoceur during working hones and treatment of work-related injuries, especially those covered by workers complemation Abough some of the clinican- ter use is ONS related Ama bebeves that a string make nie efic, coupled with specified Oils record keeping would bring aditional patinis to the time. The pressed marketing expansson