Over the past decade, the number of uninsured individuals has risen
rapidly in the Roanoke region of Virginia, placing a significant strain on
the region’s only safety net hospital, Roanoke Medical Center. To help
provide primary care services and chronic disease management services
to this population and alleviate some of the strain on the hospital’s
emergency room, the Roanoke Medical Center is partnering with a
national religious health association to establish a free clinic in the region.
Three potential clinic locations are currently under consideration: Cherry
Hill Commons, Eastgate, and Kenwood.
On average, clinic patients are expected to contribute $10 per visit,
irrespective of location. Annual donations at each location are expected
to be $1 million, and are expected to grow 15 percent annually over the
next three years. Although most clinical services are provided by
volunteers, the free clinic will have a salaried executive director, volunteer
coordinator, two full-time clinicians, and two part-time clinicians, for a total
annual cost of $275,000. Fixed costs, not including salaries, at Cherry Hill
are expected to be $340,000; fixed costs at Eastgate are expected to be
$410,000; and fixed costs for Kenwood are expected to be $378,000.
Average variable costs per visit are expected to be $20 at Cherry Hill,
$27 at Eastgate, and $24 at the Kenwood location. Expected annual
patient visits at the Cherry Hill location are 6,180; expected annual visits
at Eastgate are 5,925; and expected annual visits at Kenwood are 6,220.
a. Which location should be chosen based on total costs in year 1 of
operations?
b. Which location should be chosen based on total profits in year 1 of
operations?
Assume that by year 3 of operations, health care reform is expected
to significantly reduce the number of uninsured in the Roanoke
region. However, an influx of illegal immigrants—who are not eligible
for insurance under health care reform—is also expected to occur,
particularly near the Cherry Hill location. Accordingly, annual patient
visits in year 3 are expected to be as follows: 6,745 at Cherry Hill,
5,750 at Eastgate, and 5,825 at Kenwood. To accommodate this
increased patient demand, Cherry Hill will need to bring on additional
full-time equivalent (FTE) employees, increasing total fixed costs to
$685,000.
c. Which location should be chosen based on total costs in year 3 of
operations?
d. Which location should be chosen based on total profits in year 3 of
operations?
e. Determine the sensitivity of the decision in part (d) to a +/– 10 percent
fluctuation in visits.
