Kollel HospitalKollel is a private hospital that operates in a large metropolitan area. Th...

Kollel Hospital

Kollel is a private hospital that operates in a large metropolitan area. The hospital admits “regular” patients and “private” patients. Regular patients are admitted and treated by staff doctors who are fulltime employees of Kollel Hospital. Private patients are admitted and treated by private physicians (physicians in private practice who have admitting privileges to Kollel). To maintain its leadership role in the community, Kollel is deeply committed to its Total Quality Management program. Management and staff form multidisciplinary teams to study various hospital functions. This year, one team reviewed a hospital unit that exclusively treated a particular type of medical admittance. (All patients of this type of admittance were treated in this unit.) The team found that patients preferred to be discharged sooner rather than later and that, overall, the patients felt that they were kept in the hospital too long.

The specific unit under review consists of 16 beds. Last year the unit treated 300 patients. The patients were heterogeneous with respect to their level of illness. Properly diagnosed and treated, patients should have been discharged in an average of 16 days. Nevertheless, the TQM study showed that patients remain in the hospital an average of 19 days. Furthermore, research showed that the average stay of regular patients was shorter than the average stay of private patients, even though the private physicians did not handle more difficult cases at the time of admission. The study found that private doctors took longer to diagnose their patients and spent less time with them during treatment. As a result, these doctors did not promptly recognize whether a treatment was working or whether the patient was ready to be discharged.

In order to increase the quality of care, hospital management is studying plans to lower the average stay of these patients. One alternative being considered is preventing the private doctors, who are keeping their patients in the unit the longest, from admitting patients into the unit. Some, but not all, of these patients can be replaced by patients admitted by staff doctors. The trade-off between the number of patients admitted and the length of a patient’s stay is shown in the following table. Last year 150 regular and 150 private patients were admitted. The average stay was 16 days for regular patients and 22 days for private patients, making an overall average of 19 days per patient.

Admissions as a Function of Reducing Length of Stay

For this specific type of admittance, the hospital collects $10,000 per stay from the insurance companies, regardless of whether the patient is admitted regularly or privately. This amount is used to cover the unit’s fixed cost of $1,752,000 per year (365 days) and a variable cost of $150 per patient per day. Note that the charges for the doctor’s services are handled separately and are not considered for purposes of this analysis.

Required:

a.Calculate the average hospital stay for all patients under each scenario listed in the table. Also, for each case calculate the occupancy rate (percentage of beds filled on average). Discuss the relation between the average length of stay and the occupancy rate.

b. Prepare an income statement showing the net income for each scenario, separating the margin earned on regular and private patients. Where is profit maximized? What are the components of the change in net income?