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Medium Profitability Cost Structure Analysis Revenue Management

Hospital

#Healthcare #Hospital
ProHub Comment

This case tests the candidate's understanding of profitability drivers in a healthcare context, specifically distinguishing between fixed and variable costs when revenue contracts are binding. The case rewards structured thinking through the profit equation and creative problem-solving that addresses both cost control (physician behavior alignment, resource utilization management) and revenue enhancement (new payer contracts, service differentiation, market consolidation).

Estimated Time 15 minutes
Difficulty Medium
Source Harvard
50 / 100
Our client is a 350-bed hospital in a mid-size city. The organization has historically exhibited strong financial performance, and had a 1-3% operating gain each year for the last five years. However, they are projecting a $12 million operating loss this year, and expect this situation to worsen in the future. As a result, the CFO believes that they will be out of cash within five years. They have asked us to identify the source of this sudden downturn, and to come up with alternatives to restore them to a break-even position. They are one of the largest employers in the market, and will not consider layoffs as a possible solution.

Clarifying Information

  1. Revenues have dropped approximately 15% so far this year due to aggressive pricing on capitated managed care contracts that were signed in January and declining admissions and length of stay for their fee-for-service contracts, most of which are still reimbursed on a per diem basis. All contracts are binding for three years, and cannot be renegotiated.
  2. Hospital occupancy is approximately 70%, resulting in high fixed costs that are not covered by the current contribution margin. The organization is currently staffed for 80% occupancy.
  3. The utilization of diagnostic and therapeutic services during a patient’s stay is approximately 15% higher than what was expected when contract pricing was negotiated.
  4. There are two other 350-bed hospitals in the city. One is an academic medical center, the other a catholic hospital recently acquired by a for-profit chain. Additionally, total admissions in the marketplace have dropped by 5% and total patient days have declined 10%.