Break-even Issue in Hospital

Case Statement:

CEO of a hospital has come to you. His hospital board will fire him if they do not break-even this year. He needs your help for the same. What do you suggest?

Bain

Profitability

Healthcare

Hard

C: Since it is a multi-specialty hospital, I am assuming that it has separate departments for gynecology, cardiology, neurology, general physician etc.

I: Well, for this case, assume only maternity ward, general sickness ward and an emergency ward.

C: Okay. Since the hospital is not able to break even, I would like to analyze their revenue streams and cost centers. For a hospital, patients are their major source of revenue, others could be research wing, medical school (since many medical schools and hospitals run together), medical seminars etc.

I: Good. But, for your convenience, consider only patients as the revenue streams.

C: Sure. Looking at the costs, it would include operational costs like rent, electricity etc. and salaries of doctors, nurses and administrative staff.

I: Yes. The costs incurred by the hospital is Rs. 12 crores/year. Assume it includes all the costs that you have mentioned. How do you think the revenue of the hospital would be calculated? What factors will be included? Can you give me an equation for the same?

C: When we talk about maternity and emergency ward, we know that the patients would stay overnight and occupy the bed, but for general sickness, the patient might not stay in the hospital and their revenue would come only from the doctor’s consultation.

I: That’s a good point. But for the sake of simplicity, assume that the general sickness ward patients also stay overnight.

C: Okay, then I believe the revenue would be dependent on the no. of beds available in the hospital among all the wards and their percentage occupancy.

Therefore, Revenue = No. of beds x % occupancy x Rate/bed x No. of days/year

C: So, do we have any figures about the number of beds, % occupancy etc. in order to calculate the revenues.

I: Yes. Maternity ward has 200 beds with an 80% occupancy. Rate/bed is Rs.500.

General sickness ward has 200 beds with a 60% occupancy. Rate/bed is Rs. 1000.

Emergency ward has 100 beds with a 30% occupancy. Rate/bed is Rs. 2000.

C: So, for the ease of calculation, I am taking no. of days/year to be 300. The current revenue is Rs. 7,80,00,000 which is Rs. 4,20,00,000 less than the costs incurred by the hospital. (Refer the case workings to see the values.)

Since this hospital is not able to break even, I would like to understand the hospital industry a little more. Do we have enough number of beds? Are the occupancy rates of our hospital at par with the industry trends? Are our prices comparable to those of industry? Are other hospitals also facing a similar problem?

I: No. The industry standards for occupancy for maternity wards is same. But for general sickness ward it is 80% and for emergency ward it is 60%. Our prices are at par with the competitors.

C: Since the % occupancy for general sickness ward and emergency ward is less, we should look at them one by one and try to understand the issue here. First, lets look at the General sickness ward. If we look at the patient journey map, the two important touchpoints would be doctors and nurses. Are we understaffed on either of them?

I: Yes, we are understaffed on nurses and that’s why we have to sometimes turn away patients. What do you suggest we do?

C: We can hire more nurses, but that would lead to an increase in the costs.

We can increase the shift hours of the nurses in order to ensure better service to patients.

I: That won’t be possible as they are already overworked. Can you think of anything else?

C: Since most of the nurses’ job requires observing the patient, we can leverage the CCTV network to monitor patients in a common room and nurses can go and cater to the patients as and when required.

I: That’s a good suggestion. Moving on, let’s look at the emergency ward. Why do you think the emergency ward is under-utilized? Apart from shortage of nurses what do you think could be a possibility?

C: When a person meets with an accident, an ambulance carries them to the hospital where the doctors and nurses take care of the patient in the emergency ward. There is specialized equipment to conduct special tests like X-RAY, MRI etc.

Since this is a multi-specialty hospital, I am assuming that the specialized equipment is present in the hospital. Do we have a smaller number of ambulances to bring the patients to the hospital?

I: Well, ambulance fleet is not maintained by the hospital. It is maintained by government and the drivers have a list of all the nearby hospitals in order to take the patient to the hospital at the earliest.

So, the problem is that list is not updated for more than 50% of the ambulances and hence drivers do not know about our hospital and are thus not bringing patients to us. How do you think we can solve this problem?

C: I think we should contact the government agencies which oversee it and get the hospital name updated on the list.

I: Fair enough. Now assume that by following the suggestions that you gave we are able to reach the industry standards of occupancy. Calculate the revenue again.

C: The revenue comes out to be Rs. 10,80,00,000. (Refer case workings to see the values)

I: So, we are still not able to break even. Now what do you suggest we should do?

C: In order to break even, we should introduce more facilities in the hospital, specialized departments like oncology etc. This way we can create an extra revenue stream.

I: That is a good suggestion, but that would require capital investment as well which would increase our costs. Can you think of something that can be done with the existing infrastructure so that we can charge extra on the existing services we are offering?

C: In the maternity ward, we can introduce stem cell preservation after birth. We can charge some premium for this service and many people are preserving stem cells these days in order to treat life-threatening diseases in future.

I: Good suggestion. Suppose we introduce this and now we can charge Rs. 250 extra per maternity ward bed. Can you recalculate the revenue? Will be able to break even now.

C: Yes. (Refer case workings for the values.)

I: Thanks. We can close the case here.

Background Information:

Client: Multi-specialty hospital

Products: Healthcare services

Competitors: Other hospitals

Timeline: 6 years

Patients: Pregnant women, emergency cases & general sickness

Location: NA

Case tips:

Interviewer was trying to test the candidate’s ability to think on feet.

Be careful with the formula and calculations.

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