This is a classic healthcare profitability case requiring candidates to analyze a loss-making department through the lens of contribution margin analysis. The key insight is recognizing that Medicare patients, while unprofitable on a fully-allocated cost basis, still contribute positively to covering fixed costs—making their elimination inadvisable. The case tests both quantitative skills (breakeven calculation, margin analysis) and strategic thinking (competitive benchmarking, pricing strategy).
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.