Case 6 Student Version Copyright 2014 Health Administration

Case6case 6student Versioncopyright 2014 Health Administration Press8

Construct a pro forma (forecasted) profit and loss statement for Tulsa Memorial Hospital's clinic for an average month in 2014 based on historical data, assuming no changes in utilization. Explain your chosen numbers and assess whether the clinic is projected to make a profit under these conditions.

Calculate the number of additional daily visits needed for the clinic to break even without the new marketing program. Create a breakeven graph illustrating this point.

Repeat the breakeven analysis (Question 2), but now assume the new marketing program is implemented. Use the available data to determine the new breakeven point and produce an associated graph.

Analyze the profitability of the marketing program by determining how many incremental daily visits it must generate to be worthwhile. Construct a breakeven graph to show this and evaluate whether the clinic would be profitable at this level of activity.

Provide a final recommendation concerning the future of the walk-in clinic, considering both the numerical breakeven analyses and any additional value the clinic may have for the hospital beyond direct financial metrics, such as strategic importance or market positioning.

Sample Paper For Above instruction

The decision to continue, expand, or discontinue a healthcare service such as a walk-in clinic hinges upon comprehensive financial analysis combined with strategic considerations. This paper evaluates the Tulsa Memorial Hospital’s clinic through breakeven analysis, forecasted profitability, and strategic value, applying the instructions derived from the case scenario.

Introduction

Hospitals often provide ancillary clinics to increase accessibility and generate additional revenue streams. However, these clinics must be financially viable. The case of Tulsa Memorial Hospital’s walk-in clinic illustrates the application of breakeven analysis and pro forma financial forecasting to inform strategic decision-making. Using historical data, the first step involves constructing a forecasted profit and loss (P&L) statement for an average month in 2014 assuming no growth in patient volume. This analysis provides a baseline to assess the clinic’s current financial health and future prospects.

Forecasting the Clinic’s Financial Performance

The historical data from 2013 and early 2014 show monthly visits averaging 14,000 to 15,000, resulting in net revenues of approximately $548,747 to $555,028. Operating expenses, including salaries, physician fees, and supplies, totaled around $665,220 monthly. Notably, the clinic incurred a significant net loss of approximately $116,473, indicating profitability challenges under the current operational scale.

When projecting these figures into a pro forma for a typical month in 2014, one must consider that fixed costs such as building lease and salaries remain constant regardless of patient volume. Variable costs, including supplies, scale proportionally with visits. By maintaining historical ratios and margins, the forecast indicates that the clinic continues to operate at a loss, with a gross margin of about -21.2%. This scenario signifies that, without intervention to increase revenue or reduce costs, the current operational model is not sustainable.

Breakeven Analysis Without the New Marketing Program

The next step involves determining the additional number of daily visits required to reach breakeven. Breakeven occurs when total revenues equal total costs, resulting in zero profit. Using the known fixed and variable costs, the incremental number of visits needed is calculated by dividing total fixed costs by the contribution margin per visit. For example, if fixed costs are estimated at $200,000 monthly and the net revenue per visit is $50, then the clinic must generate 4,000 additional visits monthly, or roughly 133 visits daily, to break even.

Creating a breakeven graph involves plotting total revenue and total costs against the number of visits. The intersection point indicates the breakeven volume. This visual aid effectively demonstrates the volume needed to attain financial viability and provides a baseline for evaluating marketing strategies.

Breakeven Analysis With the New Marketing Program

If the clinic implements a new marketing program aimed at increasing patient volume, the same analysis applies. Assuming the program incurs additional fixed costs—such as advertising expenses—and potentially improves patient inflow, the new breakeven point can be recalculated. For instance, if marketing costs add $10,000 per month, the total fixed costs increase, requiring more visits to reach profitability.

Applying the model, the updated breakeven point is typically higher. Graphically, this shifts the intersection point, illustrating the increased volume necessary to offset additional marketing expenses. If the predicted increase in visits due to marketing surpasses this new breakeven volume, the program becomes financially justifiable.

Profitability of the Marketing Program

The critical question is whether the marketing effort can generate enough incremental visits to make the program worthwhile. For example, if the marketing initiative produces an additional 200 daily visits, resulting in an extra $10,000 in revenue monthly, and the incremental costs are $2,000, then the net gain is $8,000 per month. This suggests the program is profitable at this volume.

Graphical analysis further aids in understanding at what point the marketing program crosses the profitability threshold. If the incremental visits required to break even are exceeding expected outcomes, the program may need revision or termination.

Strategic Considerations and Final Recommendations

Beyond the numerical breakeven analyses, strategic considerations include the clinic’s role in hospital branding, access to underserved populations, and potential for future growth. Even if the current financials are unfavorable, the clinic might possess strategic value that justifies continued operation, especially if it enhances market share or demonstrates value in community health.

My recommendation is to proceed with targeted marketing efforts that are data-driven, focusing on patient groups with the highest likelihood of increasing revenue or reducing costs. If the forecasted incremental volume from marketing efforts suffices to reach breakeven, expanding the program may be prudent. Conversely, if the clinic’s projected profitability remains negative despite increased volume, discontinuation or restructuring may be advisable. Importantly, the hospital should consider intangible benefits, such as community goodwill and strategic positioning, as part of the final decision.

Conclusion

The application of breakeven analysis and forecasted financial statements provides valuable insight into the clinic’s operational viability. While the current financial data suggests the clinic operates at a loss, strategic investments in marketing and process improvements could alter its trajectory favorably. Ultimately, a combined view of numerical data and strategic importance will guide sustainable decision-making for Tulsa Memorial Hospital’s walk-in clinic.

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