Explain Exhibits 1 and 2 in the case as a basis for your analysis. What is the link between these two exhibits?
? What should administrators and clinicians consider when deciding whether to close a service?
? Can you quantify the aspects of this decision from the perspective of both Drs. Lawrence and Newell? How do those perspectives differ?
? Are there other factors that must be considered? If so, what are they?
? What assumptions are necessary to calculate a breakeven volume for the dialysis unit? Of what use is this type of analysis? (You need not necessarily calculate this number.)
? What will happen to total costs and revenues if the renal dialysis unit is closed? (This is probably the key quantitative question.)
? What are the options that both Drs. Newell and Lawrence should consider?
? Is the dialysis unit self-sustaining? Please explain briefly.
? Other than closing the unit, what other options are available for the hospital and what are their financial consequences?
? Should the unit be closed?
? What should administrators and clinicians consider when deciding whether to close a service?
? Can you quantify the aspects of this decision from the perspective of both Drs. Lawrence and Newell? How do those perspectives differ?
? Are there other factors that must be considered? If so, what are they?
? What assumptions are necessary to calculate a breakeven volume for the dialysis unit? Of what use is this type of analysis? (You need not necessarily calculate this number.)
? What will happen to total costs and revenues if the renal dialysis unit is closed? (This is probably the key quantitative question.)
? What are the options that both Drs. Newell and Lawrence should consider?
? Is the dialysis unit self-sustaining? Please explain briefly.
? Other than closing the unit, what other options are available for the hospital and what are their financial consequences?
? Should the unit be closed?
1. (Regarding Dr. Lawrence’s first statement in the case with respect to the $425 per treatment cost):
2. (Regarding what’s lost and what’s gained if we close the unit):
3. (Regarding the issue of breakeven and self-sufficiency of the unit): Click Here To Get More On This Essay!!!
Lakeside Hospital
A hospital just can’t afford to operate a department at 50 percent capacity. If we average 20 dialysis pa-
tients, it costs us $425 per treatment, and we’re only paid $250. If a department can’t cover its costs, includ-
ing a fair share of overhead, it isn’t self-sufficient and I don’t think we should carry it.
Peter Lawrence, M.D., Director of Specialty Services at Lakeside Hospital, was addressing
James Newell, M.D., Chief Nephrologist of Lakeside’s Renal Division, concerning a change in
Medicare’s payment policies for hemodialysis treatments. Recently, Medicare had begun paying
independent dialysis clinics for standard dialysis treatments, and the change in policy had caused
patient volume in Lakeside’s dialysis unit to decrease to about 50 percent of capacity, producing a
corresponding increase in per-treatment costs. By February of the current fiscal year, Dr. Lawrence
and Lakeside’s Medical Director were considering closing the hospital’s dialysis unit.
Dr. Newell, who had been Chief Nephrologist since he’d helped establish the unit, was opposed
to closing it. Although he was impressed by the quality of care that independent centers offered, he
was convinced that Lakeside’s unit was necessary for providing back-up and emergency services
for the outpatient centers, as well as for treatment for some of the hospital’s seriously ill inpatients.
Furthermore, although the unit could not achieve the low costs of the independent centers, he dis-
agreed with Dr. Lawrence’s cost figure of $425 per treatment. He resolved to prepare his own cost
analysis for their next meeting.
BACKGROUND
Approximately twenty years ago, at Dr. Newell’s initiative, Lakeside had opened the dialysis
unit, largely in response to the growing number of patients with chronic kidney disease. The hospi-
tal’s renal division had long provided acute renal failure care and kidney transplants, but the the
most common treatment for end-stage renal disease was hemodialysis. During dialysis, a portion of
a patient’s blood circulates through an artificial kidney machine and is cleansed of waste products.
Used three times a week for 4 to 5 hours, the kidney machine allows people with chronic kidney
disease to lead almost normal lives.Click Here To Get More On This Essay!!!
Lakeside’s dialysis unit had 14 artificial kidney machines. Because of space limitations, they
used only 10 at any one time, reserving the other four for breakdowns and emergencies. Open six
days a week with two shifts of patients daily, the unit could provide 120 treatments a week, which
meant they could accommodate 40 regular patients.
THE CRIMSON PRESS CURRICULUM CENTER
THE CRIMSON GROUP, INC.
_____________________________________________________________________________________________
This case was prepared by Patricia O’Brien under the direction of Professor David W. Young. It subsequently was
revised by Professor Young. It is intended as a basis for class discussion and not to indicate either effective or inef-
fective handling of an administrative situation.
Copyright © 2005 by David W. Young and The Crimson Group, Inc. All rights reserved. To order copies or request
permission to reproduce this document, contact The Crimson Press Curriculum Center at 617-497-9600 (Voice) or
617-576-7693 (Fax), or go to www.thecrimsongroup.net. Under provisions of United States copyright laws, no part
of this document may be reproduced, stored, or transmitted in any form or by any means without written permission
from The Crimson Group.
If you believe you have an illegal copy of this document, please notify the Curriculum Center. Thank you.
Copyrighted Material. Do not reproduce without written permission.
From 1973, the year that Medicare began reimbursing for dialysis, all dialysis patients at Lake-
side had been covered by Medicare. Until recently, the unit had been operating at almost 100 per-
cent capacity, even extending its hours to accept emergency cases and to avoid turning away pa-
tients.
Patients typically spent their first three months of dialysis in a hospital facility. If there were no
complications when this “start-up” period had passed, they were then required to transfer to an in-
dependent center.
3. (Regarding the issue of breakeven and self-sufficiency of the unit): Click Here To Get More On This Essay!!!
Lakeside Hospital
A hospital just can’t afford to operate a department at 50 percent capacity. If we average 20 dialysis pa-
tients, it costs us $425 per treatment, and we’re only paid $250. If a department can’t cover its costs, includ-
ing a fair share of overhead, it isn’t self-sufficient and I don’t think we should carry it.
Peter Lawrence, M.D., Director of Specialty Services at Lakeside Hospital, was addressing
James Newell, M.D., Chief Nephrologist of Lakeside’s Renal Division, concerning a change in
Medicare’s payment policies for hemodialysis treatments. Recently, Medicare had begun paying
independent dialysis clinics for standard dialysis treatments, and the change in policy had caused
patient volume in Lakeside’s dialysis unit to decrease to about 50 percent of capacity, producing a
corresponding increase in per-treatment costs. By February of the current fiscal year, Dr. Lawrence
and Lakeside’s Medical Director were considering closing the hospital’s dialysis unit.
Dr. Newell, who had been Chief Nephrologist since he’d helped establish the unit, was opposed
to closing it. Although he was impressed by the quality of care that independent centers offered, he
was convinced that Lakeside’s unit was necessary for providing back-up and emergency services
for the outpatient centers, as well as for treatment for some of the hospital’s seriously ill inpatients.
Furthermore, although the unit could not achieve the low costs of the independent centers, he dis-
agreed with Dr. Lawrence’s cost figure of $425 per treatment. He resolved to prepare his own cost
analysis for their next meeting.
BACKGROUND
Approximately twenty years ago, at Dr. Newell’s initiative, Lakeside had opened the dialysis
unit, largely in response to the growing number of patients with chronic kidney disease. The hospi-
tal’s renal division had long provided acute renal failure care and kidney transplants, but the the
most common treatment for end-stage renal disease was hemodialysis. During dialysis, a portion of
a patient’s blood circulates through an artificial kidney machine and is cleansed of waste products.
Used three times a week for 4 to 5 hours, the kidney machine allows people with chronic kidney
disease to lead almost normal lives.Click Here To Get More On This Essay!!!
Lakeside’s dialysis unit had 14 artificial kidney machines. Because of space limitations, they
used only 10 at any one time, reserving the other four for breakdowns and emergencies. Open six
days a week with two shifts of patients daily, the unit could provide 120 treatments a week, which
meant they could accommodate 40 regular patients.
THE CRIMSON PRESS CURRICULUM CENTER
THE CRIMSON GROUP, INC.
_____________________________________________________________________________________________
This case was prepared by Patricia O’Brien under the direction of Professor David W. Young. It subsequently was
revised by Professor Young. It is intended as a basis for class discussion and not to indicate either effective or inef-
fective handling of an administrative situation.
Copyright © 2005 by David W. Young and The Crimson Group, Inc. All rights reserved. To order copies or request
permission to reproduce this document, contact The Crimson Press Curriculum Center at 617-497-9600 (Voice) or
617-576-7693 (Fax), or go to www.thecrimsongroup.net. Under provisions of United States copyright laws, no part
of this document may be reproduced, stored, or transmitted in any form or by any means without written permission
from The Crimson Group.
If you believe you have an illegal copy of this document, please notify the Curriculum Center. Thank you.
Copyrighted Material. Do not reproduce without written permission.
From 1973, the year that Medicare began reimbursing for dialysis, all dialysis patients at Lake-
side had been covered by Medicare. Until recently, the unit had been operating at almost 100 per-
cent capacity, even extending its hours to accept emergency cases and to avoid turning away pa-
tients.
Patients typically spent their first three months of dialysis in a hospital facility. If there were no
complications when this “start-up” period had passed, they were then required to transfer to an in-
dependent center.
Click Here To Get More On This Essay!!!
Most independent dialysis centers were centrally owned and operated, and were organized into
satellite groups spread throughout urban and suburban areas. The facilities were modern and attrac-
tively designed and, because they were separate from hospitals’ institutional environments, they of-
fered psychological advantages to patients. Centrally managed with low overhead, they could
achieve economies unobtainable by similar hospital units. Supplies and equipment were purchased
in bulk, for example, and administrators watched staff scheduling and other costs closely. As a re-
sult, their per treatment costs were significantly lower than those in a hospital facility. For example,
a treatment in a center operating at 100 percent capacity with 40 patients could cost as little as $160.
LAKESIDE DATA
Lakeside’s direct and allocated costs for the Renal Dialysis Unit in the previous fiscal year are
detailed in Exhibit 1. Dr. Newell also obtained the unit’s cost center report for the same fiscal year
(Exhibit 2), which provided a breakdown of the unit’s direct costs.
Dr. Newell intended to use the prior year’s costs to calculate the per-treatment cost at various
volume levels for the current year. He also wanted to find the point at which the unit’s revenue
would meet its costs. He commented:
I plan to use only those costs that can be traced directly to dialysis treatments, and not any overhead costs.
If the unit’s revenue meets its direct costs, it is self-sufficient. Peter’s treatment cost of $425 is misleading
since it includes substantial overhead, and this year’s overhead will differ from last year’s because of the
unit’s decrease in volume. Also, even though this year’s overhead can’t be calculated until the end of the fis-
cal year, I think I can come up with an estimate. First, though, I plan to calculate the “real” cost of a treat-
ment and, from there, define a “fair share” of overhead.Click Here To Get More On This Essay!!!
In reviewing the cost center report, Dr. Newell realized that the nature of the costs varied.
There are three types of costs I need to consider in this analysis: those that vary in proportion to volume,
those that vary with significant changes in volume, and those that remain the same regardless of the unit’s
volume. The first and the last are pretty clear. Medical supplies, purchased laboratory services, and water
usage all change according to the number of treatments provided. The other non-personnel expenses will stay
essentially the same regardless of the number of treatments.
Salary and wages, and employee expense costs are more complicated. Although they didn’t change during
the last year, the unit’s number of treatments also remained fairly steady. However, the significant reduction
in volume this year might cause a corresponding reduction in salary and employee expenses. Last year, we
employed seven hemodialysis technicians, seven nurses, and one administrator (our nephrologists are all on
the hospitals’ physicians’ payroll). However, since I had anticipated that volume would fall, I didn’t replace
the nurse and two technicians who left in January of this year. So, as of February, our monthly salaries and
employee expenses have decreased by about $7,500.
Finally, just as a precaution, in case Peter asks, I had my secretary call a hospital equipment supply manu-
facturer to discuss the resale value of our 14 machines. They told her that machines used for four years or
more could not be sold, even for scrap. We purchased all 14 machines five years ago for $210,000.
Click Here To Get More On This Essay!!!
Lakeside Hospital
• June 2005 2 of 5
Copyrighted Material. Do not reproduce without written permission.
Assignment
1.
What is the breakeven volume for the dialysis unit? What assumptions are necessary for calculating it?
2.
What is a fair share of overhead at the current level of activity in the unit?
3. What will happen to total costs and revenues at Lakeside if the dialysis unit is closed? What other options are
available and what are their financial consequences?
4.
What should Dr. Newell do?
5.
What should Dr. Lawrence do?
_____________________________________________________________________________________________
Lakeside Hospital
• June 2005 3 of 5
Most independent dialysis centers were centrally owned and operated, and were organized into
satellite groups spread throughout urban and suburban areas. The facilities were modern and attrac-
tively designed and, because they were separate from hospitals’ institutional environments, they of-
fered psychological advantages to patients. Centrally managed with low overhead, they could
achieve economies unobtainable by similar hospital units. Supplies and equipment were purchased
in bulk, for example, and administrators watched staff scheduling and other costs closely. As a re-
sult, their per treatment costs were significantly lower than those in a hospital facility. For example,
a treatment in a center operating at 100 percent capacity with 40 patients could cost as little as $160.
LAKESIDE DATA
Lakeside’s direct and allocated costs for the Renal Dialysis Unit in the previous fiscal year are
detailed in Exhibit 1. Dr. Newell also obtained the unit’s cost center report for the same fiscal year
(Exhibit 2), which provided a breakdown of the unit’s direct costs.
Dr. Newell intended to use the prior year’s costs to calculate the per-treatment cost at various
volume levels for the current year. He also wanted to find the point at which the unit’s revenue
would meet its costs. He commented:
I plan to use only those costs that can be traced directly to dialysis treatments, and not any overhead costs.
If the unit’s revenue meets its direct costs, it is self-sufficient. Peter’s treatment cost of $425 is misleading
since it includes substantial overhead, and this year’s overhead will differ from last year’s because of the
unit’s decrease in volume. Also, even though this year’s overhead can’t be calculated until the end of the fis-
cal year, I think I can come up with an estimate. First, though, I plan to calculate the “real” cost of a treat-
ment and, from there, define a “fair share” of overhead.Click Here To Get More On This Essay!!!
In reviewing the cost center report, Dr. Newell realized that the nature of the costs varied.
There are three types of costs I need to consider in this analysis: those that vary in proportion to volume,
those that vary with significant changes in volume, and those that remain the same regardless of the unit’s
volume. The first and the last are pretty clear. Medical supplies, purchased laboratory services, and water
usage all change according to the number of treatments provided. The other non-personnel expenses will stay
essentially the same regardless of the number of treatments.
Salary and wages, and employee expense costs are more complicated. Although they didn’t change during
the last year, the unit’s number of treatments also remained fairly steady. However, the significant reduction
in volume this year might cause a corresponding reduction in salary and employee expenses. Last year, we
employed seven hemodialysis technicians, seven nurses, and one administrator (our nephrologists are all on
the hospitals’ physicians’ payroll). However, since I had anticipated that volume would fall, I didn’t replace
the nurse and two technicians who left in January of this year. So, as of February, our monthly salaries and
employee expenses have decreased by about $7,500.
Finally, just as a precaution, in case Peter asks, I had my secretary call a hospital equipment supply manu-
facturer to discuss the resale value of our 14 machines. They told her that machines used for four years or
more could not be sold, even for scrap. We purchased all 14 machines five years ago for $210,000.
Click Here To Get More On This Essay!!!
Lakeside Hospital
• June 2005 2 of 5
Copyrighted Material. Do not reproduce without written permission.
Assignment
1.
What is the breakeven volume for the dialysis unit? What assumptions are necessary for calculating it?
2.
What is a fair share of overhead at the current level of activity in the unit?
3. What will happen to total costs and revenues at Lakeside if the dialysis unit is closed? What other options are
available and what are their financial consequences?
4.
What should Dr. Newell do?
5.
What should Dr. Lawrence do?
_____________________________________________________________________________________________
Lakeside Hospital
• June 2005 3 of 5
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