CASE STUDY 1
Improving Profitability
Sample Student 2
Southern New Hampshire University
CASE STUDY 2
Improving Profitability
Nowicki (2022) explained that managers must review and understand costs in relation to
associated volumes and revenues to determine profit or loss. This process is known as cost-
volume-profit analysis. Specifically, there are two ways to that one can understand the ins and
outs of this process: costs per period and costs per unit.
Exhibit 8.5-Cost Per Period
Costs per period include fixed costs and variable costs. Nowicki (2022) stated, “when
classifying these costs in relation to an accounting period, fixed costs remain constant and
variable costs change in relation to volume” (p. 176). Fixed costs include the cost of electricity,
water, and sewer. Variable costs, such as supplies, vary with volume.
As a skilled healthcare manager, one of the ways that I can improve profitability without
raising rates is by reducing staffing costs through data analysis to aid in staffing decisions.
According to Jarousse (2012), wages and benefits account for two-thirds of every dollar spent by
hospital systems. “The AHA [American Hospital Association] reports that labor costs are the
single most important driver of spending growth for hospitals, accounting for about 35 percent of
overall growth” (para. 2). Becker’s Hospital Review (2009) encouraged hospital leaders to use
flexible staffing. This includes employees who work on a part-time basis, pro re nata (prn-as
needed) employees, and super float pools to facilitate staffing adjustments as census changes.
Hospital leaders should also consider evaluating the efficiency of this method by “continuously
reviewing benchmarking data such as hours worked per case” (Becker’s Hospital Review, 2009,
para. 4).
Another way to improve profitability without raising rates is by reducing the cost of
supplies through better management of vendors. Ellison (2015) reported that one of the easiest
CASE STUDY 3
and most straightforward methods for reducing supply costs is by asking vendors to lower their
prices. “Cutting costs is essential for both nonprofit and for-profit healthcare organizations, and
administrators are often times put in an extremely difficult position when deciding where those
savings need to come from” (Ellison, 2015, para. 2).
Exhibit 8.6-Costs Per Unit
Costs per unit analysis is the opposite of a costs per period analysis in that fixed costs are
determined by volume and variable costs remain unchanged with respect to volume.
Specifically, total costs are equal to variable costs per unit, an amount that remains constant. In
addition, fixed costs decline as volume increases. This type of cost analysis referred to as
contribution margin. Gallo (2017) explained, “when you make a product or deliver a service and
deduct the variable cost of delivering that product, the leftover revenue is the contribution
margin” (para. 3). Analysis of the contribution margin is just one of the ways that to help
improve profitability without raising rates. Managers can accomplish this by analyzing the
quality of the supplies that hospital staff utilize daily to determine if a positive or negative profit
margin exists. For example, if a hospital invests in linens that cost less per unit, cheaply made,
and do not last may result in a negative profit margin. However, if the system invests a little
more in a product that is of higher quality, over time, the profit contribution margin may change
from negative to positive. If the contribution margin is positive, “it contributes to fixed costs and
profit” (Gallo, 2017, para. 10).
Another way to improve profitability through the classification of costs per unit is to
outsource the management of certain services such as food and laundry services. “By
outsourcing certain services to more efficient providers, hospitals can share the savings with the
service provider” (Becker’s Hospital Review, 2009, para. 29). Often, outsourcing is considered a
CASE STUDY 4
wise option to improve profitability as long as the healthcare organization can become more
efficient through economies of scale in their operations (Becker's Hospital Review, 2009).
Collectively, “hospitals should work to encourage physicians to become more concerned
about the costs of supplies and activities, such as unnecessary tests and inefficient coding
processes that may drive up hospitals costs” (Becker’s Hospital Review, 2009, para. 23). In both
employment models and co-management joint ventures, tying quality and efficiency metrics to
pay might be one method of achieving physician compliance with cost-saving initiatives.
Reports indicate that the utilization of patient care based on protocols can help decrease the costs
of unnecessary tests or treatments. As previously discussed, high-quality, cost-effective
products, can effectively reduce costs for hospital systems (Becker's Hospital Review, 2009).
Conclusion
Prior to initiation of methods to improve profitability without raising rates, managers in
healthcare must take the time to understand the relationship between costs and expenses.
Additionally, engaging the grass roots staff who perform the activities of daily operations,
managers can glean critical information regarding cost, waste, and efficiency opportunities.
From here, the best methods for that specific hospital system can be determined.
CASE STUDY 5
References
Becker's Hospital Review. (2009). 10 Best practices for increasing hospital profitability.
https://www.beckershospitalreview.com/news-analysis/10-best-practices-for-increasing-
hospital-profitability.html
Ellison, A. (2015). Brains over brawn is the key to reducing supply costs.
https://www.beckershospitalreview.com/finance/brains-over-brawn-is-the-key-to-
reducing-supply-costs.html
Gallo, A. (2017). Contribution margin: What it is, how to calculate it, and why you need it.
https://hbr.org/2017/10/contribution-margin-what-it-is-how-to-calculate-it-and-why-you-
need-it
Jarousse, L. (2012). Managing workforce costs. https://www.hhnmag.com/articles/6101-
managing-workforce-costs
Nowicki, M. (2022). Introduction to financial management of healthcare organizations (8th ed.).
Health Administration Press.
