Princeton-Plainsboro Hospital to Enter Niche Specialties

Case Type: improve profitability.
Consulting Firm: Putnam Associates first round full time job interview.
Industry Coverage: healthcare: hospital & medical.

Case Interview Question #01333: Your client Princeton-Plainsboro Teaching Hospital is a large single-site hospital serving a wide range of patients. Formerly known as the University Medical Center of Princeton at Plainsboro, the hospital is located in Plainsboro, Middlesex County, New Jersey. The hospital is a member of the Princeton HealthCare System.

The hospital’s board is concerned because they have noticed a decline in the hospital’s earnings from medical services even though the number of patients have remained static. The hospital has hired your consulting firm to help them figure out what the problem is and come up with a strategy to increase earnings. What would you recommend the client do?

Possible Answers:

1. Case Overview

This case has two main components. First, investigate the decline in earnings for the hospital, then use that as a basis to develop a new corporate strategy to increase earnings. The investigation of decline in earnings will be more structured with defined information and calculations to be completed. However, the strategy development part is more open-ended and gives the candidate the opportunity to be creative.

2. Additional Information

No specific information is needed upfront except to note that the hospital is large and serves a very wide range of patients.

Please also hand candidate the exhibit entitled “Average reimbursement per patient at Princeton-Plainsboro”.

Exhibit 1. Average reimbursement per patient at Princeton-Plainsboro (USD $)

3. Key Discussion Points

a. Industry overview

* The case discussion begins with some overview of the hospital industry, particularly where a hospital’s earnings come from.
* The interviewer or case giver should answer any questions related to the industry either with specific information from the following discussion points, from personal knowledge, or just state that they are irrelevant to the case but encourage the candidate that assumptions can be made.
* Health reform is a good discussion to have, but unnecessary for the case.

b. Earnings Calculation

* Provide additional information as requested by the candidate.
* Have the candidate speculate on sources of revenue for the hospital.
* Have the candidate speculate on sources of costs for the hospital.
* After discussing revenues and costs, give the candidate the attached revenue and costs charts.
* Public insurance includes Medicare and Medicaid.

c. Strategic Discussion

* Once the cause of the earnings decrease is identified, the candidate should move forward to talk about some solutions to the problem.
* Corporate development (merger/acquisition, joint venture, partnership) needs to be explored.

d. Presentation

* Discuss risk and rewards.
* Concise delivery of conclusions to the CEO of the hospital.

4. Detailed Analysis

a. Earnings Analysis

Question #1: Given the attached chart, what was the operating margin for the hospital in Year 2004 and what is it in Year 2010?

Additional Information to be provided if asked

* Per patient costs:
– 2004: $4,000;
– 2006: $4,400;
– 2008: $4,600;
– 2010: $4,800

* Patient Mix by Insurance type was constant over time:
– Private: 50%
– Public: 40%
– Uninsured: 10%

Possible Answer:

Calculations:

* Year 2004:
– Average per patient revenue for all patients = $6,800*(50%) + $5,300*(40%) + $3,300*(10%) = $5,850
– Operating Margin = (Revenue-Costs) / Revenue = ($5,850-4,000) / $5,850 = 31.6% = ~32%

* Year 2010:
– Average per patient revenue for all patients = $6,300*(50%) + $3,700*(40%) + $3,300*(10%) = $4,960
– Operating Margin = (Revenue-Costs) / Revenue = ($4,960-$4,800) / $4,960 = 3.2%

Note:
* The actual number of patients do not matter as we are just looking for margin.
* Assumptions/rounding can be made, adjust answers accordingly.

Question #2: Why are earnings declining?

Possible Answer:

From the calculations above we can see that operating margin has dropped ten fold from 32% to 3.2%. Reasons for the decline include:

* The biggest problem is drop in public insurance (Medicare/Medicaid) reimbursement amounts (from $5,300 to $3,700).
* Private reimbursement also fell from $6,800 to $6,300.
* Overall, revenues are dropping (from $5,850 to $4,960).
* Costs are rising steadily over time.

b. Strategic Recommendation

Question #3: Given the answer to the question #2, what would you recommend the hospital do?

Additional Information to be provided if asked

* Market:
– There are no other large hospital direct competitors within a 20 minutes drive.
– There are specialty clinics and other small private practices that cater to niche patient groups.

Possible Answer:

Areas to cover (lead the candidate through)

The interviewer should make sure that the candidate considers corporate development with a local specialty clinic that has desirable (profitable) patients.
* The client can acquire a local specialty clinic by purchasing.
* The client can enter into a joint venture or partner to provide some services in hospital, split profits with external specialist doctor.
* The client can try entering niche specialties alone by opening up a new office and hiring staff.

Suggested Strategies

Revenue:
* Charge more for services (could partner with other hospitals in state when negotiating reimbursement rates)
* Attract more high margin private insurance patients via advertising, etc.
* Acquire, joint venture, or do some sort of corporate development with a local specialty clinic that serves private insurance patients with high reimbursement.
* Lobby the government to raise public reimbursement rates.

Costs:
* Buy supplies for less (could partner with other hospitals in state when negotiating prices)
* Attract lower cost patients with selective advertising, etc. (e.g. target young rather than old, etc)
* Find efficiencies/synergies somewhere with a purchase of a local specialty clinic.

5. Conclusion & Recommendation

Question #4: Ask the candidate to wrap up the case and offer a final recommendation to the client CEO.

Possible Answer:

The interviewer should make sure the candidate wraps up the case by describing what he/she has explored and what the recommendations are to the CEO.

The candidate needs to first cover calculation of operating margins and implications. Then the candidate needs to cover relevant strategies with their potential risks and rewards.