Business Planning for Health Organizations ID 536 April 25, 2008 Paul Campbell Harvard School of Public Health

2 Agenda Q & A Breakeven Analysis: Lakeside Hospital Business Plan Analysis: Asia Renal Care

3 Lakeside Hospital

4 Lakeside - Breakeven Analysis Revenue $Costs 20 Patients Current Volume

5 Lakeside - Breakeven Analysis Revenue $Costs Volume

6 Lakeside - Breakeven Analysis Revenue $Costs Volume

7 Decision-Making Process 1.Compute breakeven volume with direct costs only 2.Calculate contribution to allocated costs at current volume (50% capacity) 3.Analyze assumptions underlying projections 4.Consider allocated costs 5.Include non-financial considerations

8 Volume Data 40Patients at full capacity 20Patients at half capacity 3Treatments required per patient per week 156Treatments required per patient per year - (3 treatments x 52 weeks 2Shifts operating, 6 days per week

9 Fixed Costs A. MINOR EQUIPMENT$11,424 B. MAJOR EQUIPMENT$13,128 C. TOTAL $ 24, 552 KEY CONCEPT: SUNK COSTS

10 Sunk Costs DEFINITION: Costs which were covered in the past, which cannot be changed. APPLICATION: In differential cost analysis, only costs and revenues which will be encountered in the present and foreseeable future should be included.

11 Semi-Fixed Costs A. SALARY AND WAGES B. EMPLOYEE EXPENSES COSTS FOR 2 MONTHS: (EXHIBIT 3) SALARY AND WAGES$36,400 EMPLOYEE EXPENSE 2,350 TOTAL……………………………$38,750 LESS STAFF REDUCTION -6,000 TOTAL AT 50% CAPACITY$32,750 X6 ANNUAL COST AT 50% CAPACITY $196,500 1 NURSE 2 TECHNICIANS

12 Variable Costs A. MEDICAL SUPPLIES: TOTAL SUPPY COST Variable Supply Cost per # TREATMENTS=Treatment 245, 458 5, 736=$42.79 B. PURCHASED LAB SERVICES: 12, 238 5,736=$2.13 C. WATER USAGE: 10,448 5,736=$1.82 D. VAR. COST PER TR. = $46.74

13 Breakeven Computation (AT 50% CAPACITY, 20 PATIENTS) FIXEDSEMI-FIXED VARIABLE PRICE (X) = COSTS + COSTS + COSTS (X) 138X =11, , X 91.26X = $ 207,924 X = 2,278 TREATMENTS AT BREAKEVEN ? BREAKEVEN NUMBER OF PATIENTS 156 TREATMENTS REQUIRED BY EACH PATIENT PER YEAR 2, = 15 PATIENTS TO ACHIEVE BREAKEVEN

14 Breakeven Computation AT 50% CAPACITY, 20 PATIENTS, AND ONE SHIFT FIXEDSEMI-FIXED VARIABLE PRICE(X) = COSTS + COSTS + COSTS (X) 138X = 11, , X 91.26X =135,588 X =1,486 TREATMENTS AT BREAKEVEN 156 TREATMENTS REQUIRED BY EACH PATIENT PER YEAR 1,486 = PATIENTS TO ACHIEVE BREAKEVEN

15 Contribution AT 50% CAPACITY, 20 PATIENTS REVENUE: 20 PATIENTS X 156 TREATMENTS X $138 = $430,560 DIRECT COSTS: FIXED$11,424 SEMI-FIXED196,500 VARIABLE145,829(46.74 X 20 X 156) TOTAL$353,753 CONTRIBUTION TO HOSPITAL OVERHEAD $76,807

16 Contribution AT 50% CAPACITY, 20 PATIENTS AND ONE SHIFT REVENUE: 20 PATIENTS X 156 TREATMENTS X $138 = $430,560 DIRECT COSTS: FIXED$11,424 SEMI-FIXED124,164 VARIABLE145,829 (46.74 X 20 X 156) TOTAL $281,417 CONTRIBUTION TO HOSPITAL OVERHEAD $149,143

17 Assumptions Underlying Breakeven Calculations ASSUMPTIONS FORCES COSTSLABOR/MATERIALS SUPPLY/DEMAND INFLATION PRICEPOLITICS VOLUMECOMPETITION TECHNOLOGY LIFESTYLE AREA POPULATION

18 Full Cost Calculation DIRECT COSTS$353,753 (AT 50% CAPACITY) INDIRECT COSTS$277,267 EXHIBIT 3 TOTAL COSTS$631,020 SURPLUS/LOSS PER TREATMENT: NUMBER OF TREATMENTS3,120 (20 X 156) REVENUE PER TREATMENT$ FULL COST PER TREATMENT $631,020 3,120 LOSS PER TREATMENT ($64.25)

19 Cost Analysis Matrix DIRECT/ASSIGNEDALLOCATED FIXED VARIABLE

Asia Renal Care

21 Asia Renal Care: What do we know? End-Stage Renal Disease (ESRD) - life- threatening condition. Dialysis – Treatment provided with widely varying utilizations rates across countries. ARC proposes to set up a network of dialysis clinics in three countries – Taiwan, China and the Philippines.

22 Asia Renal Care ARC has already identified $2.5 million and wants an additional $7.5 million in equity for the first round of financing. Based on a three-country plan, ARC plans to have 45 centers and over 3,100 patients by year 5. ARC also plans to achieve consolidated revenue of $42 million, and operating income (before interest, tax, depreciation and amortization) of $11 million.

23 Dialysis Center

24 Comparing Providers by Type United StatesAsia Hospitals30%81% Physician- owned 30%14% Chain40%5% 100%

25 Reimbursement rate In US$ –Taiwan156 –South Korea126 –China 53 –Malaysia 62 –Thailand 91 –Indonesia 90 –India 40 –Philippines 100

26 Financial Projections Five components provided in case: – Basic assumptions –“Consolidated results” for 3 countries –“Single center” projection by country –“All centers”projection by country –“Worksheets” to calculate year-by-year results by each country

27 Discussion Questions 1.How attractive is the dialysis market in Asia? Rank the three countries (Taiwan, China and the Philippines) in terms of the likelihood of success. Explain why. 2.What are the advantages and disadvantages of ARC being a for-profit dialysis center? 3.Should the investment be made? Why? Why not?

28 Country comparison TaiwanPhilippinesChina Highest reimbursement with universal coverage No gov’t. reimbursement, only private insurance Low gov’t. reimbursement for 20% of population High labor cost and high rent Low labor costLow labor cost and no rent Matured dialysis market, high prevalence rate, established economy Early dialysis market, low prevalence rate, emerging economy Strong market knowledge Less stable currencyHigh regulation possibly

29 Being a For-Profit ARC…..Advantages Facilitates access to capital Facilitates monetary incentives for employees Provides attractive opportunity to business- minded employees Disadvantages Growth is an imperative Undue influence (from investors) on performance Taxes Potential loss of grant, contract opportunities

30 ARC Today

31 ARC now operates in: Taiwan Philippines Malaysia Singapore (HQ) Hong Kong Japan

32 Company shareholders Satellite Dialysis Center, a US-based non- profit entity based in California. Other equity investors including Fidelity Capital, Walden Group, Investor AB, Equitable.