You are a newly hired operations manager within Simi Regional
Hospital. Prior to your arrival, based on customer feedback, the
executive leadership team has developed interest in the purchase,
installation, and employment of a new radiology service line. Using a
planning process to define a new radiology service line, a decision is
being requested, but leadership feels they do not have a complete answer
to proceed. Bear in mind that a decision matrix gave the new radiology
service line a high priority.
Administrators want to evaluate its
financial feasibility, but, as the newest member of the team, they first
want to hear your input. Estimated fixed costs are $1 million, and the
estimated net reimbursement level is $1,500 per procedure. Physicians
and other provider salaries on a direct basis are $340 per procedure,
and total operating expenses will add another $160 per procedure.
Calculate the breakeven point for this potential new service line.
- If Simi Regional discovered a way to reduce the total initial
investment to $600,000, causing the average pricing level to fall to
$1,200 and the other assumptions to stay the same, how many procedures
would be required to break even? - Assuming that the hospital conservatively estimates that it can
deliver 1,000 procedures in the first year, which option should be
chosen? Is it financially feasible to purchase, install, and employ the
new radiology line? Or should the new radiology service be cancelled?
Using the breakeven analysis, and your own research on the
proposal, provide a written recommendation to the executive leadership
team and the Board of Directors regarding the benefit (or lack thereof)
of proceeding with the purchase and further developing the service line
for Simi Regional Hospital.
- Your paper should be 3-4 pages (not including cover and reference
pages) and should be supported by a minimum of three sources. These
sources should not be more than 3-5 years old. - All citations and references must conform to the CSU-Global Guide to Writing and APA (Links to an external site.). The CSU-Global library (Links to an external site.) is a good place to find these references.
Required Textbook:
Langabeer,
J. R., & Helton, J. (2016). Healthcare operations management: A
systems perspective (2nd ed.). Burlington, MA: Jones & Bartlett
Learning. ISBN-13: 978-1284050066
Expert Solution Preview
Introduction:
As a medical professor in charge of creating college assignments and answers for medical college students, this assignment involves conducting a cost-benefit analysis for a new radiology service line for Simi Regional Hospital.
Answer 1:
To calculate the breakeven point for the potential new service line, we need to use the formula:
Breakeven point (in procedures) = Total fixed costs / (Net reimbursement level – Direct costs per procedure)
Substituting the given values, we get:
Breakeven point = $1,000,000 / ($1,500 – $500)
Breakeven point = 1,000 procedures
Therefore, the hospital needs to perform 1,000 procedures to break even.
Answer 2:
Using the given information, we can calculate the breakeven point for the revised scenario as follows:
Breakeven point = $600,000 / ($1,200 – $500)
Breakeven point = 857 procedures
Therefore, the hospital needs to perform 857 procedures to break even with the reduced initial investment.
Assuming that the hospital conservatively estimates it can deliver 1,000 procedures in the first year, based on the breakeven analysis, purchasing, installing, and employing the new radiology line is financially feasible with the reduced initial investment. Therefore, the new radiology service line should not be canceled.
Recommendation:
Based on the breakeven analysis and research conducted, it is recommended that the executive leadership team and the Board of Directors approve the purchase, installation, and employment of the new radiology service line for Simi Regional Hospital with the reduced initial investment. This decision will help improve service delivery, enhance customer satisfaction, and generate more revenue for the hospital.
