You have been asked to help evaluate some potential changes to the orthopedic de
ID: 409284 • Letter: Y
Question
You have been asked to help evaluate some potential changes to the orthopedic department in your hospital. The independent orthopedic group who works in your hospital has approached the CEO with a proposal to establish a joint venture program to perform certain procedures in an outpatient center. Currently, the hospital performs all joint replacements on an inpatient basis, but the surgeons believe that most replacements can safely be done as same-day surgery. Currently, the hospital’s knee replacement volume, revenue and costs look like this:
Hospital A
Total Knee Procedures/ year
Medicare
250
Commercial
200
Medicaid
50
Current hospitalreimbursement/case
Medicare
$15,000
Commercial
$22,000
Medicaid
$14,000
Fixed Costs
$3,750,000
Implantable device cost/case
$5,000
Other variable costs/case
$2,500
The orthopedic group believes that, if the reimbursement for commercial patients was reduced by 25%, they could attract another 100 commercial cases per year. Their proposal, then, is to establish a joint venture company that will sub-lease operating room time and personnel from the hospital and that all commercial cases would run through this JV. The Medicare and Medicaid cases would stay at the hospital with no change. Because the JV is owned 50/50 by the hospital and the surgeons, they would receive 50% of any net income generated by the JV. You can figure fixed costs and implantable device costs won’t change (the fixed costs would be allocated over to the JV in proportion to the total number of total knees that they do per year). Because it’s actually more resource intensive to discharge a patient in the same day, you should figure that the ‘Other variable costs’ will rise by $500 per case. The ortho group has also let you know that, should the hospital not wish to do this deal, they will take the idea to your cross-town competitor. If the JV is established between your competitor and the ortho group, your hospital would lose all of the commercial cases you currently have, but keep the Medicare and Medicaid cases.
How will you advise your CEO? As you consider how to answer, you should construct an analysis that shows 3 scenarios – 1) status quo, 2) JV with your ortho group at your hospital and 3) a JV established between your ortho group and your competitor hospital. Your analysis should show net income for the hospital for each option.
Hospital A
Total Knee Procedures/ year
Medicare
250
Commercial
200
Medicaid
50
Current hospitalreimbursement/case
Medicare
$15,000
Commercial
$22,000
Medicaid
$14,000
Fixed Costs
$3,750,000
Implantable device cost/case
$5,000
Other variable costs/case
$2,500
Explanation / Answer
As per the information given the first scenario of STATUS QUO is as follows:
The calculations with respect to JV with ortho group at the hospital as follows:
The calculations for the third scenario is as follows:
It is quite clear from the above analysis Status quo is best but keeping in view the third scenario of losing all commercial (most profitable) cases, Hospital may not be profitable.
Procedures Reimbursement per case $ No. In year Total reimbursment Medicare 15000 250 3750000 Commercial 22000 200 4400000 Medicaid 14000 50 700000 Total 500 8850000 Fixed cost 3750000 Implantdevice cost 2500000 Variable cost 1250000 Total cost 7500000 Total Profit 1350000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.