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, its fine medical staff, its reputation for quality care, 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 (ED) within the hospital complex and a stand-alone walk in clinic located across the street from the areas major shopping mall, about two miles from the hospital.

According to a Wall Street Journal article, urgent care centers are increasingly visited by patients who need immediate treatment for an illness, such as the flu or sore throat, or an injury, such as a nail gun puncture. Urgent care centers are distinguished from similar types of ambulatory healthcare providers, such as Eds 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) EDs. Urgent care centers, notes the Wall Street Journal 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 typically less than for ED visits. Currently, 8,000 urgent care centers are in operation across the United States, including about 1,200 that are hospital affiliated.

Mike Reynolds, Reeds Chief Executive Officer (CEO), is concerned about the urgent care centers overall financial soundness. About ten years ago, all three area hospitals jumped onto the urgent care center bandwagon, and within a short time, there were five such centers 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 or close its urgent care center. The urgent care center currently handles a patient load of 45 visits per day, but it has the physical capacity to handle up to 85 visits a day. Mikes decision has been complicated by the fact that Rose Daniels, Reeds Marketing Director, has been pushing to expand the marketing program for the urgent care center. She believes that an expanded marketing effort aimed at local businesses would bring in the number of new patients needed to make the urgent care center a financial winner.

Mike has asked Brent Williams, Reeds Chief Financial Officer, to analyze the options. In their meeting, Mike stated that he visualizes three potential outcomes for the urgent care center: (1) close it; (2) continue to operate it without expanding marketing; or (3) continue to operate it with the expanded marketing effort. As a starting point, Brent collected the most recent historical financial and operating data for the clinic, which are summarized in Exhibit 1.1. In assessing the historical data, Brent noted that one competing center had recently (December 2009) closed its doors. Furthermore, a review of several years of financial data revealed that the urgent care center does not have a pronounced seasonal utilization pattern.

Exhibit 1.1 Reed Walk-In Clinic: Historical Financial Data

This case illustrates the use of volume break-even analysis to assess the financial impact of several alternative courses of action regarding a hospitals Urgent Care Center. Because there are no capital expenditures involved in the alternatives, a discounted cash flow (NPV/IRR) analysis cannot be undertaken. 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 Urgent Care Center's director. Assess each element in the performance 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 Urgent Care Center's director?
2. Does the Urgent Care Center have any value to the hospital beyond that considered by the numerical analysis just conducted?
3. Do the actions by Baptist Hospital have any bearing on the final decision regarding the Urgent Care Center?
4. What is your final recommendation concerning the future of the Urgent Care Center?

Please Help!!!!

Reed Hospital - BEA.pdf Exhibit 1.2-Reed Walk-in Clinic: Monthly incremental CostData Number of Additional Visits Per Day O 1-10 11-20 21-30 31-40 Medical supplies $3 per visit Administrative supplies $50 per visit Total variable cost per visit $350 per VARIABLE COSTS assessing the historical data, Brent noted that one competing center had recently (December 2009) dosed its doors. Furthermore, a review of several years of financial data revealed that the urgent care center does not have a pronounced seasonal utilization pattem. Exhibit 11-Reed Walk-in Clinic: Historical Financial Data Monthly Averages CY 2009 lan. 2010 Feb. 2009 lan Feb Total Number of his 2010 2010 14.522 1355 1335 Net Revenue 1210 1350 1230 554 747 $35,028 $54748545 729 $54 888 $42037 $154,250 $12.540 hyldan fees $ $13.546 $12354 513 543 192.000 $12.952 10,000 Malpractices 18,000 16.000 18 000 TL 16.286 31 440 2215 Travel and duction 3215 2620 12152705 5355 538 General 665 447 602 469 1112 843 843 Sur 676 343 700 189 O D 16 Bectricity 0 M 14 11 820 1124 1029 985 Wwe 1077998 1260 135 142 105 Enuipment Rental 139316 1260 105 105 105 Building 105 105 155,745 12.500 12.500 Other party Epe 12,979 12.500 12,910 1011728 8152 2923 8648 5038 Total Operating Expenses 4561 $655,220 SS2 557,966555.435 558,019 55.210 Net Profil $116.471 11241 ( 1532181159706) $31722 58773) Groe Margin IN 5.73 59% -21.25 5.8 -187 SEMI FOXED COSTS Salaries and wages Physicians fees $4000 10.000 $5000 10.00 $6000 $2000 10.000 200.00 Total monthly semifred costs SO $10.000 $15.000 6.00 $27.000 FIXED COSTS Marketing assistant's salary Advertising expenses $3000 $4000 I I $3000 $4000 $3000 $400g $3000 $400 $3000 $4000 Total Monthly Faed Cost 57000 57000 57000 57000 57000 Next, Brent met several times with the urgent care center's administrative director. The primary purpose of the meetings was to estimate the additional costs that would have to be borne if volume rose above the current lanuary/February average level of 45 visits per day. Any incremental usage would require additional expenditures for administrative and medical supplies: estimated to be 53.00 per patient visit for medical supplies, such as tongue blades and rubber gloves, and so 50 per patient visit for administrative supplies, such as file folders and clinical record sheet Because of the relatively low volume level, the urgent care center 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 staffing increases. Furthermore, as the number of visits increases, the urgent care center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 12 The urgent care center's building is leased on a long-term basis. Reed could cancel the lease, but the lease contract calls for a cancellation penalty of three month's rent (537,500 at the current lease rate. In addition, Brent was started to read in the newspaper that Baptist Hospital, Reed's major competitor, had just bought the city's largest primary care practice, and Baptist's CEO was quoted as saying that more group practice acquisitions are planned as the hospital moves to embrace healthcare reform. Brent wondered whether Baptist's actions would influence the decision regarding the urgent care center's fate Finally, Brent met with Rose (Reed's Marketing Director to learn more about the proposed marketing expansion. The primary focus of the expansion would be on occupational health Services (OHS). OHS involves providing medical care to employees of local businesses, including physical examinations, treatment of illnesses that occur during work hours and treatment of work-related injuries, especially those covered by workers compensation. Some of the urgent care center's business is already OHS related, but Rose believes that a strong marketing effort, coupled with specialued OHS record keeping could bring additional patients to the urgent care center. The proposed market expansion requires a marketing assistant who will run the effort for the OHS program. In addition, marketing would incur advertising costs for newspaper, radio, and TV ads, as well as for brochures and handouts. The incremental costs associated with marketing are also summarized in Exhibit 12. With a blank spreadsheet on his computer screen, Brent began to construct a model that would provide the information needed to help the board make a rational, financially sound decision At fire, Brent planned to conduct a standard capital budgeting analysis that focused on the Reed Hospital - BEA.pdf Number of Visits Net Revenue Pro Forma (Forecasted) Profit and Loss Statement For the Urgent Care Center's Average Month 1,350 $54,888 profitability of the urgent care center as measured by net present value or internal rate of retum. But then he realized that the expanded marketing requires no capital investment and no valid data are available on the incremental increase in visits that would be generated either by an increasing population base or the expanded marketing. Finally, he remembered that Mike requested that the analysis consider the inherent profitability of the urgent care center without the expanded marketing effort. With these points in mind, Brent thought that a break-even analysis would be very useful in making the final decision. Specifically, he wanted to develop answers to the following questions posed by Mike: 1. What is the projected profitability of the urgent care center for the entire year if volume continues at the current level? 2. How many additional visits per day will be required to break even without the expanded marketing? 3. How many additional visits per day would be required to break even, assuming that , marketing is expanded? How many additional daily visits would expanded marketing have to bring in to make it worthwhile, regardless of the overall profitability of the urgent care center? In addition, Brent wonders if the urgent care center could "infiate its way to profitability that is, if volume remained at its current level, could the urgent care center be expected to become profitable in, say five years, solely because of inflationary increases in revenues? Finally, Brent is concerned about whether the analysis was giving the urgent care center full credit for its financial contributions to Reed Hospital. Brent did not want to change the spreadsheet at this late date, but he does want to make sure that any additional financial value is at least considered qualitatively. Overall, Brent must consider all relevant factors - both quantitative and qualitative - and come up with a recommendation regarding the future of the urgent care center Using the historical data as a guide (Exhibit 1.1), Brent constructed a pro forma (forecasted) Profit and Loss Statement for the clinic's average month for all of 2010, assuming the status quo. With no change in (volume) utilization, is the clinic projected to make a profit? Here is his reasonable estimate of the average monthly cash flows: Salaries and Wages Physicians Fees Malpractice Insurance Travel and Education General Insurance Subscriptions Electricity Water Equipment Rental Building Lease Other Operating Expenses IL Total Operating Expenses $13,500 18,000 3,215 602 843 14 1000 130 105 12.500 8,000 $57909 I 4 Net Profit (Loss) Gross Margin (%) ($3,021) -5.5% Here is the logic Brent used in creating these flows First, he used the January/February 2010 average for the number of visits and net revenue, because the case states (1) that urgent care center's usage is not seasonal and (2) that a competitor recently closed its doors. These facts lead him to conclude that the most recent historical data is the best estimate for the future. For the remaining cash flows, he used the 2009 average month data, the January/February 2010 average, or the combined average, depending on which historical amount he thought most representative of the future Then Brent considered the urgent care center's situation without the new marketing program How many additional daily visits must be generated to break even? He constructed a break. even graph that can be included in his report, Tatal Monthly Visits Total Daily Visits Net Revenue Per Visit Number of Additional Visits Per Day 0 5 10 1350 1500 1650 45 SO 55 540.66 SIA. $40.66 152025 1800 1950 21.00 606570 $40.66 340.44 SI 6 Total Net Monthly Revenue 560.062 567.05 SLIM 579 280 SES:31 557,909 Total Current Costs Total increment Costs $57.900 1425 $57.900 15.00 $57,809 557.0 $57.904 11.575 12.100 125 14:35 5 Red Hospital DLA par SPSLAG SAN S4224 SAMT 14N Bon between 1 and 20 incremental visits (S0 and 65 daily patient visits. Figure 1 complete the data we see that breakeven occurs at 17 incremental daily visits, so at 62 patient wisi perde the went care center is expected to turn a profit without the new I Theret med that the new marketing program is implemented. Here is his tabular data if the new marketing program is implemented Number Vis Perwy 10 1950 2100 35 SA 20 25 5 ISO 15 1600 60 Then Brent focused solely on the expected profitability of the proposed in program How many incremental daily visits must the program generate to make it worth in other words, how many incremental visits would it take to pay for the proper irrespective of overall urgent care center's profitability? He constructed a graph showing the expected profitability of the proposed program versus incrementala Focusing on the incremental cash flow analyses paints a somewhat retenue. Here, the incremental revenues from adding additional patient vita per day are compared directly with the incremental costs of the marketing program and the areas and costs associated with increased patient load. We see that incremental costs will be covered when 21 additional patients are seen daily. Thus, if the marketing program dan penerate 21 or more incremental visits, it will pay for itself See Figure 05 TO LIN $9331 552100 ST 5579 $87. og 2400 SALSA With the proposed marketing program, the added costs push the break even point out further Now, break even on 24 incremental daily visits 19 visits per day. goes wa Note that the urgent care center will not break even at this level of incremental daily visits. We have already determined the break-even point with the new marketing program to be 24 incremental visits. Thus, 21 visits will pay for the marketing effort, but it will not make up for the existing profit shortfall. Although you are basically satisfied with the analysis thus far, you are concerned about the uncertainties inherent in the revenue and expense data supplied by the urgent care center's director. Assess each element in your Question 1 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 urgent care center's director? Reed Hospital - BEA.pdf Exhibit 1.2-Reed Walk-in Clinic: Monthly incremental CostData Number of Additional Visits Per Day O 1-10 11-20 21-30 31-40 Medical supplies $3 per visit Administrative supplies $50 per visit Total variable cost per visit $350 per VARIABLE COSTS assessing the historical data, Brent noted that one competing center had recently (December 2009) dosed its doors. Furthermore, a review of several years of financial data revealed that the urgent care center does not have a pronounced seasonal utilization pattem. Exhibit 11-Reed Walk-in Clinic: Historical Financial Data Monthly Averages CY 2009 lan. 2010 Feb. 2009 lan Feb Total Number of his 2010 2010 14.522 1355 1335 Net Revenue 1210 1350 1230 554 747 $35,028 $54748545 729 $54 888 $42037 $154,250 $12.540 hyldan fees $ $13.546 $12354 513 543 192.000 $12.952 10,000 Malpractices 18,000 16.000 18 000 TL 16.286 31 440 2215 Travel and duction 3215 2620 12152705 5355 538 General 665 447 602 469 1112 843 843 Sur 676 343 700 189 O D 16 Bectricity 0 M 14 11 820 1124 1029 985 Wwe 1077998 1260 135 142 105 Enuipment Rental 139316 1260 105 105 105 Building 105 105 155,745 12.500 12.500 Other party Epe 12,979 12.500 12,910 1011728 8152 2923 8648 5038 Total Operating Expenses 4561 $655,220 SS2 557,966555.435 558,019 55.210 Net Profil $116.471 11241 ( 1532181159706) $31722 58773) Groe Margin IN 5.73 59% -21.25 5.8 -187 SEMI FOXED COSTS Salaries and wages Physicians fees $4000 10.000 $5000 10.00 $6000 $2000 10.000 200.00 Total monthly semifred costs SO $10.000 $15.000 6.00 $27.000 FIXED COSTS Marketing assistant's salary Advertising expenses $3000 $4000 I I $3000 $4000 $3000 $400g $3000 $400 $3000 $4000 Total Monthly Faed Cost 57000 57000 57000 57000 57000 Next, Brent met several times with the urgent care center's administrative director. The primary purpose of the meetings was to estimate the additional costs that would have to be borne if volume rose above the current lanuary/February average level of 45 visits per day. Any incremental usage would require additional expenditures for administrative and medical supplies: estimated to be 53.00 per patient visit for medical supplies, such as tongue blades and rubber gloves, and so 50 per patient visit for administrative supplies, such as file folders and clinical record sheet Because of the relatively low volume level, the urgent care center 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 staffing increases. Furthermore, as the number of visits increases, the urgent care center would have to hire additional staff members. The incremental costs associated with increased volume are summarized in Exhibit 12 The urgent care center's building is leased on a long-term basis. Reed could cancel the lease, but the lease contract calls for a cancellation penalty of three month's rent (537,500 at the current lease rate. In addition, Brent was started to read in the newspaper that Baptist Hospital, Reed's major competitor, had just bought the city's largest primary care practice, and Baptist's CEO was quoted as saying that more group practice acquisitions are planned as the hospital moves to embrace healthcare reform. Brent wondered whether Baptist's actions would influence the decision regarding the urgent care center's fate Finally, Brent met with Rose (Reed's Marketing Director to learn more about the proposed marketing expansion. The primary focus of the expansion would be on occupational health Services (OHS). OHS involves providing medical care to employees of local businesses, including physical examinations, treatment of illnesses that occur during work hours and treatment of work-related injuries, especially those covered by workers compensation. Some of the urgent care center's business is already OHS related, but Rose believes that a strong marketing effort, coupled with specialued OHS record keeping could bring additional patients to the urgent care center. The proposed market expansion requires a marketing assistant who will run the effort for the OHS program. In addition, marketing would incur advertising costs for newspaper, radio, and TV ads, as well as for brochures and handouts. The incremental costs associated with marketing are also summarized in Exhibit 12. With a blank spreadsheet on his computer screen, Brent began to construct a model that would provide the information needed to help the board make a rational, financially sound decision At fire, Brent planned to conduct a standard capital budgeting analysis that focused on the Reed Hospital - BEA.pdf Number of Visits Net Revenue Pro Forma (Forecasted) Profit and Loss Statement For the Urgent Care Center's Average Month 1,350 $54,888 profitability of the urgent care center as measured by net present value or internal rate of retum. But then he realized that the expanded marketing requires no capital investment and no valid data are available on the incremental increase in visits that would be generated either by an increasing population base or the expanded marketing. Finally, he remembered that Mike requested that the analysis consider the inherent profitability of the urgent care center without the expanded marketing effort. With these points in mind, Brent thought that a break-even analysis would be very useful in making the final decision. Specifically, he wanted to develop answers to the following questions posed by Mike: 1. What is the projected profitability of the urgent care center for the entire year if volume continues at the current level? 2. How many additional visits per day will be required to break even without the expanded marketing? 3. How many additional visits per day would be required to break even, assuming that , marketing is expanded? How many additional daily visits would expanded marketing have to bring in to make it worthwhile, regardless of the overall profitability of the urgent care center? In addition, Brent wonders if the urgent care center could "infiate its way to profitability that is, if volume remained at its current level, could the urgent care center be expected to become profitable in, say five years, solely because of inflationary increases in revenues? Finally, Brent is concerned about whether the analysis was giving the urgent care center full credit for its financial contributions to Reed Hospital. Brent did not want to change the spreadsheet at this late date, but he does want to make sure that any additional financial value is at least considered qualitatively. Overall, Brent must consider all relevant factors - both quantitative and qualitative - and come up with a recommendation regarding the future of the urgent care center Using the historical data as a guide (Exhibit 1.1), Brent constructed a pro forma (forecasted) Profit and Loss Statement for the clinic's average month for all of 2010, assuming the status quo. With no change in (volume) utilization, is the clinic projected to make a profit? Here is his reasonable estimate of the average monthly cash flows: Salaries and Wages Physicians Fees Malpractice Insurance Travel and Education General Insurance Subscriptions Electricity Water Equipment Rental Building Lease Other Operating Expenses IL Total Operating Expenses $13,500 18,000 3,215 602 843 14 1000 130 105 12.500 8,000 $57909 I 4 Net Profit (Loss) Gross Margin (%) ($3,021) -5.5% Here is the logic Brent used in creating these flows First, he used the January/February 2010 average for the number of visits and net revenue, because the case states (1) that urgent care center's usage is not seasonal and (2) that a competitor recently closed its doors. These facts lead him to conclude that the most recent historical data is the best estimate for the future. For the remaining cash flows, he used the 2009 average month data, the January/February 2010 average, or the combined average, depending on which historical amount he thought most representative of the future Then Brent considered the urgent care center's situation without the new marketing program How many additional daily visits must be generated to break even? He constructed a break. even graph that can be included in his report, Tatal Monthly Visits Total Daily Visits Net Revenue Per Visit Number of Additional Visits Per Day 0 5 10 1350 1500 1650 45 SO 55 540.66 SIA. $40.66 152025 1800 1950 21.00 606570 $40.66 340.44 SI 6 Total Net Monthly Revenue 560.062 567.05 SLIM 579 280 SES:31 557,909 Total Current Costs Total increment Costs $57.900 1425 $57.900 15.00 $57,809 557.0 $57.904 11.575 12.100 125 14:35 5 Red Hospital DLA par SPSLAG SAN S4224 SAMT 14N Bon between 1 and 20 incremental visits (S0 and 65 daily patient visits. Figure 1 complete the data we see that breakeven occurs at 17 incremental daily visits, so at 62 patient wisi perde the went care center is expected to turn a profit without the new I Theret med that the new marketing program is implemented. Here is his tabular data if the new marketing program is implemented Number Vis Perwy 10 1950 2100 35 SA 20 25 5 ISO 15 1600 60 Then Brent focused solely on the expected profitability of the proposed in program How many incremental daily visits must the program generate to make it worth in other words, how many incremental visits would it take to pay for the proper irrespective of overall urgent care center's profitability? He constructed a graph showing the expected profitability of the proposed program versus incrementala Focusing on the incremental cash flow analyses paints a somewhat retenue. Here, the incremental revenues from adding additional patient vita per day are compared directly with the incremental costs of the marketing program and the areas and costs associated with increased patient load. We see that incremental costs will be covered when 21 additional patients are seen daily. Thus, if the marketing program dan penerate 21 or more incremental visits, it will pay for itself See Figure 05 TO LIN $9331 552100 ST 5579 $87. og 2400 SALSA With the proposed marketing program, the added costs push the break even point out further Now, break even on 24 incremental daily visits 19 visits per day. goes wa Note that the urgent care center will not break even at this level of incremental daily visits. We have already determined the break-even point with the new marketing program to be 24 incremental visits. Thus, 21 visits will pay for the marketing effort, but it will not make up for the existing profit shortfall. Although you are basically satisfied with the analysis thus far, you are concerned about the uncertainties inherent in the revenue and expense data supplied by the urgent care center's director. Assess each element in your Question 1 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 urgent care center's director