Copyright 2013 by FACHE

6/15/12

Case 4

Better Care Clinic

(Breakeven Analysis)
Fairbanks Memorial 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 there are
two other acute care hospitals serving the same general population, Fairbanks
historically has been highly profitable because of its well-appointed
facilities, fine medical staff, and reputation for quality care. In addition
to inpatient services, Fairbanks operates an emergency room within the
hospital complex and a stand-alone walk-in clinic, the Better Care Clinic,
located about two miles from the hospital.
Todd Greene, Fairbankss chief executive officer (CEO), is concerned about
Better Care Clinics financial performance. About ten years ago, all three
area hospitals jumped onto the walk-in-clinic bandwagon, and within a short
time, there were five such clinics scattered around the city. Now, only three
are left, and none of them appears to be a big money maker. Todd wonders if
Fairbanks should continue to operate its clinic or close it down.
The clinic is currently handling a patient load of 45 visits per day, but it
has the physical capacity to handle more visits--up to 60 a day. Todd has
asked Jane Adams, Fairbankss chief financial officer, to look into the whole
matter of the walk-in clinic. In their meeting, Todd stated that he
visualizes two potential outcomes for the clinic: (1) the clinic could be
closed or (2) the clinic could continue to operate as is.
As a starting point for the analysis, Jane has collected the most recent
historical financial and operating data for the clinic, which are summarized
in Table 1. In assessing the historical data, Jane noted that one competing
clinic had recently (December 2012) closed its doors. Furthermore, a review
of several years of financial data revealed that the Fairbanks clinic does
not have a pronounced seasonal utilization pattern.
Next, Jane met several times with the clinics director. The primary purpose
of the meetings was to estimate the additional costs that would have to be
borne if clinic volume rose above the current January/February average level
of 45 visits per day. Any incremental volume would require additional
expenditures for administrative and medical supplies, estimated to be $4.00
per patient visit for medical supplies, such as tongue blades, rubber gloves,
bandages, and so on, and $1.00 per patient visit for administrative supplies,
such as file folders and clinical record sheets.

Although the clinic has the physical capacity to handle

does not have staffing to support that volume. In fact,
visits increased by 11 per day, another part-time nurse
have to be added to the clinics staff. The incremental
increased volume are summarized in Table 2.

60 visits per day, it

if the number of
and physician would
costs associated with

Jane also learned that the building is leased on a long-term basis. Fairbanks
could cancel the lease, but the lease contract calls for a cancellation
penalty of three months rent, or $37,500, at the current lease rate. In
addition, Jane was startled to read in the newspaper that Baptist Hospital,
Fairbankss major competitor, had just bought the citys largest primary care
group practice, and Baptists CEO was quoted as saying that more group
practice acquisitions are planned. Jane wondered whether Baptists actions
should influence the decision regarding the clinics fate.
Finally, in earlier conversations, Todd also wondered if the clinic could
inflate its way to profitability; that is, if volume remained at its
current level, could the clinic be expected to become profitable in, say,
five years, solely because of inflationary increases in revenues? Overall,
Jane must consider all relevant factors--both quantitative and qualitative-and come up with a reasonable recommendation regarding the future of the
clinic.

Table 1
Better Care Clinic
Historical Financial Data
Daily Averages
CY 2012 Jan/Feb13
Number of visits

41

45

Net revenue

$1,524

$1,845

Salaries and wages

Physician fees
Malpractice insurance
Travel and education
General insurance
Utilities
Equipment leases
Building lease
Other operating expenses
Total operating expenses

428
533
87
15
22
41
4
400
288
$1,818

Net profit (loss)

($

294)

451
600
107
0
28
36
5
417
300
$1,944
($

99)

Table 2
Better Care Clinic
Incremental Cost Data

Variable Costs:
Medical supplies
Administrative supplies
Total variable costs

$4.00 per visit

1.00
$5.00 per visit

Semifixed Costs:
Salaries and wages
Physician fees
Total daily semifixed costs

$ 100
267
$ 367

Note: The semifixed costs are daily costs that apply when volume increases by
11 visits above the current level of 45. However, the physical capacity of
the clinic is only 60 visits per day.

QUESTIONS
1. Using the historical data as a guide, construct a pro forma (forecasted)
profit and loss statement for the clinic's average day for all of 2013
assuming the status quo. With no change in volume (utilization), is the
clinic projected to make a profit?
2. How many additional daily visits must be generated to break even?
3. Thus far, the analysis has considered the clinic's near-term
profitability, that is, an average day in 2013. Redo the forecasted profit
and loss statement developed in Question 1 for an average day in 2018,
five years hence, assuming that volume stays constant (does not increase).
(Hint: You must consider likely changes in revenues and costs due to
inflation and other factors. The idea here is to see if the clinic can
"inflate" its way to profitability even if volume remains at its current
level.)
4. Suppose you just found out that the $3,215 monthly malpractice insurance
charge is based on an accounting allocation scheme which divides the
hospitals total annual malpractice insurance costs by the total annual
number of inpatient days and outpatient visits to obtain a per episode
charge. Then, the per episode value is multiplied by each department's
projected number of patient days or outpatient visits to obtain each
department's malpractice cost allocation. What impact does this allocation
scheme have on the clinics true (cash) profitability? (No calculations
are necessary.)
5. Does the clinic have any value to the hospital beyond that considered by
the numerical analysis just conducted? Do the actions by Baptist Hospital
have any bearing on the final decision regarding the clinic?
6. What is your final recommendation concerning the future of the walk-in
clinic?