Case

ACR Medical Lab

Problem Definition

Your client, ACR, is a chain of medical laboratories. They provide patients with MRI and CT scans as well as other major tests.

They have expensive testing equipment in their inventory and run about 250 labs. Usually doctors refer their patients to one of the labs.

Because ACR is worried about a decrease in profits, they have hired us to evaluate the market.


Comments

This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview. The questions should be read out and shared with the candidate.

The case is split into two parts:

The first part describes more qualitative problems and includes open questions to force the interviewee into thinking about the problem and possible solutions.

The second part deals with more quantitative problems and calculations. The interviewee should conduct his own calculations and solve the questions.


Short Solution


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.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

First we will start with the more qualitative part of the case.

The following framework/structure provides you with a short overview of the case:

I. Background

1. What are possible reasons for lower profits?

Here the interviewee should shortly brainstorm and come up with a list of possible reasons for declining profits. The following three reasons should be mentioned for sure:

  • Decline in sales
  • Increase in costs
  • Change in prices

After this brainstorming the interviewer should further ask about the three mentioned examples above.

2. What are possible reasons for steady or lower sales?

The interviewee should come up with at least 5 possibilities. Possible answers:

  • The society is getting healthier and therefore needs less medical surgeries, etc.
  • There is a new competitor with lower prices.
  • The costs for their services and therefore their prices are increasing.
  • The prices of the equipment are going down and therefore some doctors do the tests in their own clinical practice.
  • There are newer technologies that are not yet provided by the client.

3. Why do you think costs could increase?

The interviewee should come up with at least 5 possibilities. Make sure the answers are presented in a structured way.

  • The energy cost for the utility increases.
  • Labour costs in the country are going up across all or only the medical labour.
  • Taxes are increasing.
  • The need for big investments grows and therefore the yearly depreciation is increasing.
  • The rent for the laboratories is increasing.

4. What could lead to a change in price (up or down)?

The interviewee should come up with at least 5 possibilities. Make sure the answers are presented in a structured way.

  • More competitors join the market, which offer lower prices for their services.
  • The demand for the client’s services is decreasing / increasing.
  • The costs are increasing / decreasing.
  • New investments have to be made in the laboratories.
  • The government may raise new / higher taxes or provide subsidies / lower taxes for the client’s services.

Now we can start with the more quantitative part of the case.

Further investigation showed that a decrease in sales is actually the reason for the declining profits. This is due to doctors who started their own labs and do not refer patients to our client anymore.

II. Market

5. To which extent could this threaten ACR’s profits?

You should share diagram 1 with a market overview.

As doctors will only invest in profitable labs, the goal is finding the limit from which on it is profitable to open an own laboratory.

The more patients a doctor has the more money he gets. As a result the interviewee should find out the breakeven point of patients.

The interviewee should come up with this idea by himself and you should not share the following information before!

You should share table 1 with background information about cost and revenues of doctors.

Break-even quantity:

# of customers per year:

# of customers per day:

As a result doctors with more than 8 patients on average per day will tend to start their own laboratories.

Looking back at the diagram 1 shows that out of the total revenue of $400 million about $20 million will be lost. This corresponds to a loss of 5% of the total revenue.

III. Conclusion

6. What can the client do to decrease the impact of this issue?

Several solutions are possible. Here is just listed a small excerpt:

  • The client could offer long-term partnerships to the doctors and provide them with some kind of compensation. This could be a share of the revenue for instance. Therefore the doctors would have less incentive to invest in their own laboratories. This should only target doctors who send on average more than 8 customers per day to the client’s institutions.
  • The client could improve its services and increase the amount of services provided. For instance could the client provide very new technology for its customers or try to cover more areas with its services.
  • The client could try to lobby for tighter standards in the industry and therefore make it more difficult for new competitors to enter.

Difficult Questions

What arguments can ACR use to persuade doctors (especially with more than 8 patients per day) to sign long-term contracts?

There are many possible answers:

  • The before mentioned compensation. The client could pay doctors with a high patient-per-day rate a percentage of their revenue. This would decrease the revenue the client makes with bigger customers (doctors with more patients), but would lead to an incentive for the doctors to not invest in their own laboratory.
  • The client can provide the doctors with the newest technology, which is very expensive to buy as a small laboratory. Therefore the doctors with a high patient-per-day rate have the incentive to remain sending their patients to the client as they can advertise their high quality of service due to the possible access of very new technology.

More questions to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).

Related consulting question(s)
Best answer so far:
McKinsey / Accenture / Collected all Big 3 offers / Harvard Business School

Hi, 1) Youproactively ask in the beginning, even before drawing the structure (something like "What kind of products / revenue sources do we have) and then split the structure into price, qty,... (more)

Best answer so far out of 2 answers:
BCG Consultant / Interviewed 80+ applicants at BCG / Received offers from McK (US) and BCG (DE)

Hi Anonymous! Both are valid approaches. As a rule of thumb, 1) is more suitable for a quantitative assessment (e.g. "By how much has profit declined?"), while 2) seems like a good approach for a... (more)

Hi all, I graduated with a First in biological sciences a few years back and have since worked as... (more)

No best answer so far, read 1 answer
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Case exhibits


1. What are possible reasons for lower profits?


2. What are possible reasons for steady or lower sales?


3. Why do you think costs could increase?


4. What could lead to a change in price (up or down)?


5. Further investigation showed that a decrease in sales is actually the reason for the declining profits. This is due to doctors who started their own labs and do not refer patients to our clients anymore.

To which extent could this threaten ACR's profits?


Market overview


This graph shows the contribution to the total revenue of ACR Medical Labs split up by the different sizes of customers (in this case doctors). For instance all doctors who refer on average 2 patients per day to ACR will contribute in total with $80 million to the total revenue of ACR.

It might seem strange at the beginning that doctors with less referals of patients contribute a higher share of the total profit. This is due to the fact that there are more doctors that refer small amounts of patients to the client than doctors that refer many patients per day.

The more patients a doctor has, the more likely it is that they will start their own lab and not refer any patients to the client. This results in overall lower contributions to the total revenue.



​6. What can the client do to decrease the impact of this problem?