Case Study: Hospital Operations

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One key driver in health care is number of admissions. Can we use admissions to explain the behavior of revenue and expenses? Here are three examples.

 

Company 1

 

Owns and operates 52 non-urban acute care medical hospitals primarily in the southeast.

 

Not surprisingly, annual data indicates admissions clearly directly affect both revenue and expense. While there has been some variation over these years (perhaps due to non-admission related activity, or to fluctuations in the relationship between admissions and revenue/expense that would be clearer with monthly data), this company has consistently earned about $2000 operating income per each additional (marginal) admission over the ten years shown here. (Marginal values are important when discussing the change in amounts.)

 

Company 2

 

Owns and operates 20 non-urban acute care medical hospitals, operates 36 more, throughout the United States.

 

Company 2s relationships were not as consistent, and its operating income per admission was not as high. Operating income and expense were both lower than expected for 2001 and 2002 (more detailed data is required to explain these results). Its operating income is about half of company 1s.

 

Comparing revenue for the two companies, we can see that company 1 receives about $2000 more revenue per each additional admission, but has a much lower fixed amount (intercept). This means company 2 receives more total revenue when admissions are below about 143,000 per year, but company 1 receives more total revenue when admissions are above that level.

 

Results are similar on the expense side. An additional admission costs company 1 about $1000 more in operating expense, but its fixed cost is much lower. This means company 1 will have lower total operating expense below about 266,000 admissions.

 

The chart below summarizes these relationships.

 

The net effect is that company 1 will earn more income at admission levels above about 25,000.

Company 3

 

Owns and operates 26 hospitals in northern California (not-for-profit). Data for 1999-2000.

 

 

This company shows much higher revenue and expense for a given level of admissions than the other two companies. It also has not had a consistent relationship between admissions and revenue/expense during this timeframe. While the first two companies were similar, clearly this third company has different characteristics. Perhaps it has a large non-hospital component that has been growing.

 

Performance Chain allows you to conduct this analysis at any level of detail, so you can model each area of your business with the appropriate drivers. You will understand what drives performance in each area, and how each area affects the whole.

 

 

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