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Medium Profitability Cost Reduction

Midwest Hospital

#Healthcare
ProHub Comment

This case tests candidate understanding of contribution margin analysis versus full cost allocation, patient mix optimization, and competitive benchmarking. The key insight is recognizing that Medicare patients, while unprofitable on a fully-allocated basis, still contribute positively to covering fixed costs, and that competitor profitability differences likely stem from cost structure or pricing power rather than volume.

Estimated Time 26 minutes
Difficulty Medium
Source ROSS
10 / 100
Midwest Hospital is a research-based hospital and takes pride in its joint replacement surgery department. Recently Midwest Hospital did a P&L analysis for all departments and found that the joint replacement surgery department is providing losses. The CEO has asked us to help out.

Clarifying Information

  1. There are no financial targets.
  2. Focus of this case is only on joint replacement surgery.
  3. Give the exhibits in the subsequent slides only when the candidate asks for the relevant data.
Mock Interview
Interviewer

Midwest Hospital is a research-based hospital and takes pride in its joint replacement surgery department. Recently Midwest Hospital did a P&L analysis for all departments and found that the joint replacement surgery department is providing losses. The CEO has asked us to help out.

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
Score coming soon
Practice this case with AI Mock Interview

Midwest Hospital’s joint replacement surgery department is losing $2M despite $19M in revenue. The case requires analyzing whether to drop Medicare patients, calculating breakeven volume, and understanding why competitors remain profitable despite similar or worse patient mixes.

Key Insights:

  1. Contribution margin (marginal cost) analysis is critical—Medicare patients earning $1k above variable cost help cover fixed costs despite negative full allocation
  2. Breakeven requires 1,400 surgeries at current mix (140 commercial, 420 insurance, 840 Medicare) versus current 1,000
  3. Competitive advantage comes from cost structure or payer negotiation power, not just volume—Competitor D is profitable with 75% Medicare despite similar total surgeries
  4. Patient mix optimization and payer reimbursement negotiation are key levers alongside cost reduction