ECON 7021 - Case 3 Inpatient vs. Outpatient procedures You have been asked to help evaluate some potential changes to the orthopedic department in your hospital. The independent orthopedic group who works in your hospital has approached the CEO with a proposal to establish a joint venture program to perform certain procedures in an outpatient center. Currently, the hospital performs all joint replacements on an inpatient basis, but the surgeons believe that most replacements can safely be done as same-day surgery. Currently, the hospital's knee replacement volume, revenue and costs look like this: Hospital A Total Knee Procedures/ year Medicare 250 Commercial 200 Medicaid 50 Current hospital reimbursement/case Medicare $15,000 Commercial $22,000 Medicaid $14,000 Fixed Costs $3,750,000 Implantable device cost/case $5,000 Other variable costs/case $2,500 The orthopedic group believes that, if the reimbursement for commercial patients was reduced by 25%, they could attract another 100 commercial cases per year. Their proposal, then, is to establish a joint venture company that will sub-lease operating room time and personnel from the hospital and that all commercial cases would run through this JV. The Medicare and Medicaid cases would stay at the hospital with no change. Because the JV is owned 50/50 by the hospital and the surgeons, they would receive 50% of any net income generated by the JV. You can figure fixed costs and implantable device costs won't change (the fixed costs would be allocated over to the .IV in proportion to the total number of total knees that they do per year). Because it's actually more resource intensive to discharge a patient in the same day, you should figure that the 'Other variable costs' will rise by $500 per case. The ortho group has also let you know that, should the hospital not wish to do this deal, they will take the idea to your cross-town competitor. If the JV is established between your competitor and the ortho group, your hospital would lose a_|l of the commercial cases you currently have, but keep the Medicare and Medicaid cases. How will vou advise vour CEO? As you consider how to answer. you should construct an analvsis that shows 3