A firm managing hospitals has recently been experiencing growing pains. It has contacted our firm to ask for help.
Since this is a candidate-led case, the candidate should develop a structure to identify and solve the underlying problem, while the interviewer guides him towards relevant areas of inspection if necessary.
This is a profitability case. The interviewee must evaluate the reason for the decline in profitability and evaluate additional business opportunities.
The first part of the case is a qualitative analysis, the second encompasses calculations and is quantitative.
Short Solution (Expand) (Collapse)
Clarifying Questions the candidate should ask:
Q: What do you mean by growing pains?
A: The now formed hospital group originally consisted of only one hospital, acquired 3 other hospitals. Lately its profits are going down.
Q: Have there been other changes in the organization?
A: Yes, the CEO of the main hospital has changed; currently it is a business experience MBA, before it was an MD doctor.
Q: Have there been other changes or events affecting the hospital group?
Q: Have external market conditions changed?
The interviewee should synthesize that he/she needs to look into more details to track down the reason for the profitability decline.
Identification of the reason for profitability decline
- The acquired hospitals did not experience any decline in profits.
- Costs - No change
- Revenue - Declining
Key expected response/insight: The primary reason for profits to decline is that the revenue for the main hospital is going down.
Identification of the reason for the revenue decline in the main hospital
- As the main source of revenue the hospital treats patients and thereafter collects payments from the insurance companies based on the service provided.
- Volume of patients remains unchanged
- Product mix of the hospital (surgeries, consultations,...) remains unchanged
Key Expected Insight: In a way the average revenue per patient is decreasing, which implies that the patient mix is changing (revenue-wise).
II. Customer Analysis
Primarily the patients can be categorized into the following categories:
- Private Insurance Covered Patients
- Public Insurance Covered Patients
- No Insurance Covered Patients (Usually homeless people)
Payments from private insurance is greater than public insurance.
The reason for the revenue decline is lower revenue per customer. This seems to be caused by a lower number of patients covered by a private insurance.
With this insight, the candidate has to think about where privately insured patients come from. Mainly they arrive at the hospital through a referral by a physician.
Finally, the following hypothesis should be formulated or the direction be suggested by interviewer
- It seems like the number of referrals by physicians has declined. This could mainly be due to the management change. Maybe physicians have a lower appreciation towards a chief executive with an MBA background.
- To test this hypothesis, the physicians could be surveyed.
Key learnings from the survey:
- A significant number of physicians is indifferent towards the hospital, which is disadvantageous for the hospital in terms of referrals.
- Many doctors have issues with the complex billing.
- The hospital should strengthen its relationships with the physicians. This could lead to a higher number of referrals and increase the revenue per customer (=patients).
- The physicians complain about the complex billing. This could be an opportunity to follow up.
It looks like the hospital is offering a yet unpromoted service that could satisfy an existing demand by physicians. To see, whether this could be a viable business opportunity, we would need to know numbers to calculate the economics of this service.
- Cost of the billing service: $40,000
- Physician Annual Profit: $180,000
- Physician time-allocation: 75% on patient care, 10% on billing, 15% on administrative overhead
- We assume that the physician can use the time saved on the billing completely on seeing more patients. While billing does not generate revenue, seeing patients does.
- Relevant KPI for the physicians are Return on Investment, New Annual Profit, Increase in Annual Profit
- Revenue of an average physician: $450,000
- All of the time saved on billing can be used to see more patients
There are several ways to get to the correct numbers. Here is an exemplary one:
- Revenue earned by using outsourcing:
- ROI outsourcing:
- New annual profit:
- Increase in profit:
- The profitability decrease is due to a revenue decrease in the main hospital.
- As the number of patients as well as the product mix remain unchanged, average revenue per customer has declined.
- Due to low(er) number of referrals made by physicians, less privately insured patients come to the hospital
- Revenue could be increased by tightening relationships with physicians
- Additionally, the hospital could offer its outsourcing billing service to physicians, thereby increasing its own revenue and generating additional profit for the physicians (ROI=50%, increase in profits=11%)
- The two proposed measures could support each other