Problem Definition
Our client, Central hospital, is a 350-bed hospital based in a medium-sized city. The company has normally seen strong financial results with a 1-4% operating gain each year for the last five years. However, this year they are projecting a $14 m operating loss and the situation is expected to worsen in the future. The CFO expects to be out of cash in 2 years if not resolved.
They hired you to identify the cause of this loss and how they can hit break-even again. However, since they are an important employer, laying off staff is not an option.
Comments
This is a candidate-led case, so the candidate should take the case from start to finish.
Pay close attention to the objective of the client and the fact that laying off staff is not a viable option.
- Client negotiated contracts with insurers with wrong cost assumptions.
- Client should focus on reducing costs of resource utilization by re-negotiating with vendors and by stimulating staff to be more efficient with resources.
Detailed Solution
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
The following framework/structure provides an overview of the case:
I. Revenue
Candidate should start off by asking information on revenue to see where the problem might lie. In doing so, candidate should ask for more background info on how revenue is earned. If candidate wants to start with cost, just move to the second component and start there.
Information that can be shared if inquired by the candidate:
Revenue
- Revenue is fixed for several years through contracts with insurers.
- So far, revenue has dropped 13% this year.
- Contracts with insurers were signed this January and are binding for 3 years and are non-negotiable.
- The contracts signed are managed care contracts which are fixed in nature - there was some agressive pricing performed to get those contracts.
II. Cost
If candidate moves to cost or start with cost, he should ask for more information on cost structure.
Information that can be shared if inquired by the candidate:
Cost
- The hospital deals with fixed cost and variable cost.
- The fixed cost cannot be altered.
- Variable cost consist of payroll as its largest component.
- Second largest component is the utilization of resources by medical staff.
- Third and final cost components are basic overhead.
- Laying off staff and thus saving on payroll is not an option.
- The cost of utilization of resources is 18% higher than what was anticipated when those contracts were negotiated.
Candidate should note that the hospital made some strong assumptions when negotiating those contracts with insurers, but the real-life situation seems to be far different from the assumptions made. So we need to look into reducing the costs of utilization of resources.
III. Solution
Candidate should lay out possible solutions on both the revenue and cost side and discuss these options. Interviewer should challenge the candidate on these options and brainstorm with the candidate.
Share Diagram 2 with candidate after he/she discussed a few solutions.
- On the cost-side, the client can stimulate staff to be more efficient with resources and pressure vendors/suppliers to lower prices of materials & medication.
- On the revenue-side, client can sign more contracts with additional insurers or create niche-centers of excellence to bring in more revenue that falls outside the managed care contract.
Difficult Questions
- Which solution can be implemented within the next 6 weeks to lower costs?
- Should the client focus on cost-saving first, revenue-increase or both? Why?
