Breakeven Analysis of Physical Therapy Services

Physical Therapy Breakeven Analysis 1








Breakeven Analysis of Physical Therapy Services







Kasey Quinn Knight
St. Elizabeth Medical Center
April 20, 2004








Capstone Committee:
Leonard Heller, Ed. D
Thomas Samuel, Ph. D
Jeffrey Talbert, Ph. D

Outside Member:
Chris Carle, MSHPA
Administrator
St. Elizabeth Medical Center Grant County

---

Physical Therapy Breakeven Analysis 2
Table of Contents




















Page

I. Executive
Summary……………………………………………………………...03
II. Introduction………………………………………………………………………04
a. Statement of the Problem
b. Purpose of the Study
c. Research Question
d. Definition of Key Terms

III. Literature
Review………………………………………………………………...07
a. Alternate Site Health Care
b. Breakeven Analysis

IV. Methodology…………………………………………………………………….12
a. Focus
b. Participants / Period of Time
c. Measurement and Research Design

V. Limitations……………………………………………………………………….20
VI. Results……………………………………………………………………………22
VII.
Discussion and Conclusion………………………………………………………24
VIII. Recommendations and Implementation Strategy………………………………..28
IX.
Acknowledgements and Relevant Courses………………………………………31
X. References………………………………………………………………………..32
XI. Appendix…………………………………………………………………………33

---

Physical Therapy Breakeven Analysis 3
I.
Executive Summary

In order to accommodate increased inpatient demand and overcome capacity
issues, many hospitals are relocating ambulatory services to off-site facilities. St.
Elizabeth Medical Center Grant County (SEGC), a 15 bed critical access hospital located
in Williamstown, Kentucky, has decided to relocate physical therapy services to an
adjacent medical office building. Because this relocation will sufficiently increase the
department’s expenses, the purpose of this study is to examine the continuing viability of
these services. This will be done by conducting a breakeven analysis to determine the
patient volume required to make revenues equal to the expenses of the department (thus,
reach the breakeven point). This project will also examine the current operating capacity
of the unit and the amount of additional revenue that could be captured by increasing this
capacity.

The breakeven analysis was conducted by performing a cost-volume-profit
analysis on projected revenues for the 2004 Fiscal Year. Financial data was gathered
from 2003 performance measures and the 2004 Operating Budget. The breakeven point
for physical therapy services was determined to be 3,043 units of service or $100,419 in
patient revenue at existing capacity. The capacity evaluation showed that the physical
therapy department is currently operating at 57% of its full capacity.

Based on these results, I find that the hospital continuously reaches their
breakeven point, but has the opportunity to increase capacity beyond projected levels. I
recommend that the hospital develop a business plan to tie capacity to employee bonuses.
In addition, the hospital should allocate funds in their budget to increase marketing
efforts in order to attract more patient visits.

---

Physical Therapy Breakeven Analysis 4
II.
Introduction
STATEMENT OF THE PROBLEM

Traditionally, hospitals have focused on centralizing medical services into one
convenient location to increase patient access. However, with recent financial and spatial
constraints, many hospitals are exploring the option of offering outpatient services in off-
site facilities (Sands & Rendina, 1992). By relocating hospital-based services into the
community, hospitals can increase accessibility to patients, strengthen their presence in
the community, and overcome capacity constraints for inpatient services (Advisory Board
Company, Pediatric hospitals’ development, 2003).

St. Elizabeth Medical Center, located in Grant County (SEGC) is a 15 bed, critical
access hospital located in Williamstown, Kentucky. Therapy Services at SEGC provides
acute and rehabilitation services to inpatients and outpatients to aid in their recovery from
disease, physical injury and/or surgery. Ninety-seven percent of all services provided are
on an outpatient basis. Therefore, the financial success of this service relies primarily on
the outpatient services provided. In order to accommodate the increasing patient volume
for therapy services, SEGC has decided to relocate physical therapy services. Physical
therapy, which is currently located within the hospital, will be relocated to an adjacent
medical office building. This relocation will provide the physical therapy department
with additional office and treatment space as well as a state-of-the-art facility in which to
further their business. In addition, the vacant space within the hospital will allow other
departments to expand their services.

The new space that will be renovated to accommodate physical therapy services is
located in the Summit Medical Group office building. Summit Medical Group (SMG) is

---

Physical Therapy Breakeven Analysis 5
a physician management practice owned by St. Elizabeth Medical Center, with offices
located throughout Northern Kentucky. The space at the SMG building is currently
vacant and efforts to lease this space to other providers have been unsuccessful. Since
the hospital owns this building and SMG has a master lease for the space, the hospital, by
relocating physical therapy services, will assist in covering lease obligations. Because
the space is vacant, SMG is struggling to meet their overhead costs, yet remain profitable.
Therefore, this relocation will increase the profitability of SMG while vacating space
within the hospital that will be used to expand existing ancillary services. Furthermore,
this building although technically “off-site” is located in close proximity to SEGC,
therefore; if desired, will allow for future development of a “hospital campus” in the
future.
PURPOSE OF STUDY

The relocation of physical therapy services to an off-site facility will result in
additional expenditures for the department. The new space will be renovated for physical
therapy services to be provided in the building. In addition, there will be new office and
medical equipment to prepare the new location for business. These additional expenses
require a reassessment of profitability of the services at the current operating level. This
study was conducted to examine the viability of physical therapy services. A critical first
step requires a cost-volume-profit analysis in order to determine the level of operations
necessary for this service to breakeven. This project also addresses the operating
capacity of the department to determine the revenue potential of this operation
RESEARCH QUESTION

---

Physical Therapy Breakeven Analysis 6

The primary research question that will be answered is: What will the patient
volume of physical therapy services need to be in order for this unit to breakeven at the
end of fiscal year 2004 at current reimbursement rates and payer mix? The secondary
question is: How much additional revenue can be captured if the physical therapy
department is operating at a higher capacity?
DEFINITION OF KEY TERMS
Critical Access Hospital: Critical Access Hospital designation is provided to hospitals
located in a rural county more than 35 miles from another acute care facility. These
hospitals are certified to receive cost based reimbursement from the Centers for Medicare
and Medicaid Services. (www.cms.gov)
Fixed Costs: Fixed costs are not directly associated with patient volume. These costs are
constant regardless of the units of service provided or the number of patients treated.
Physical Therapy: Therapy services at St. Elizabeth Medical Center (SEMC) provides
acute and rehabilitation services to inpatients and outpatients at all three hospitals to aid
in their recovery from disease, physical injury and/or surgery. Services include: physical
therapy for acute conditions, including for orthopedic and neurological patients; hand
therapy including both physical and occupational therapies; work rehabilitation, available
at a separate work rehabilitation center; electromyography and nerve conduction velocity;
educational services. (www.stelizabeth.com)
Variable Costs: Variable costs (primarily medical/surgical supplies and physical
therapists’ salaries and benefits) are directly associated with patient volume. These costs
fluctuate depending on the units of service provided.

---

Physical Therapy Breakeven Analysis 7
Contribution Margin per Unit of Service: The amount of each dollar of revenue that is
available once variable costs are deducted. Contribution margin per unit is equal to the
sales price per unit minus the variable costs per unit.

---

Physical Therapy Breakeven Analysis 8
III. Literature
Review
ALTERNATE SITE HEALTH CARE

The development of off-site medical treatment facilities has had a drastic effect on
the hospital industry. Not only has the development of alternate site health care facilities
been crucial to the financial viability of hospitals, it has also provided an opportunity for
hospital growth and development within the community. In examination of literature, the
most beneficial information came from studies of rehabilitation services. Rehabilitation
services parallel those of physical therapy and can be applied to issues facing physical
therapy departments. Services that are parallel include traction, cryotherapy, and gait
training. A study entitled Pediatric Hospitals’ Development of Off-Site Rehabilitation
Clinics, examines the benefits associated with relocating the rehabilitation department of
a pediatric hospital to an off-site clinic. This study profiled four hospitals ranging in size
from 30 to 100 patient beds. Each of the profiled hospitals were not-for-profit, pediatric
specialty hospitals emphasizing in rehabilitation services, with clinics located between 3
to 25 miles from the main campus of the hospital. After following these hospitals
through development and operations of the off-site clinics, it was determined that moving
rehabilitation services to an off-site facility, is generally a very successful endeavor for
hospitals. With an off-site rehabilitation facility, the hospital has the opportunity to
improve patient access to services, thus, can increase their patient volume (Advisory
Board Company, 2003). Other benefits gained by the hospitals include: expanded market
area, increased capacity of hospital, increased number of new patients due to convenience
(Sands & Rendina, 1992). Hospital A (50 beds, 3 off-site clinics) reported having a
significant increase in patient volume in the first three years of operation of their off-site

---

Physical Therapy Breakeven Analysis 9
clinic. These increases occurred in physical therapy, occupational therapy, and speech
therapy. Patient volumes increased during the first three years by 50, 25, and 11 percent
respectively. However, the administrator at Hospital A reported that there were serious
staffing and management challenges associated with the operation of the clinic. Because
therapy patients often prefer early morning and late night appointments, the
administrators had difficulty staffing these hours. Hospitals B, C, and D in this study also
reported an increase in patient volume by at least 40 percent in the first year (Advisory
Board Company, Pediatric Hospitals’, 2003). This study was particularly beneficial to
my project because it provided insight into how patient volume may be affected by the
relocation of physical therapy services to this off-site location.

A study involving the development of satellite physician offices by hospitals in
order to meet patient demands examines the business model used by four not-for-profit
hospitals (Advisory Board Company, Business Models, 2002). The size of the hospital
ranged from 50 to 400 beds. The significant findings of this study include key factors
that should be taken into consideration when developing an off-site clinic. One of these
factors is the business model. A hospital must determine whether they will build the
clinic from scratch, affiliate hospital and independent physicians, or purchase the clinic
from the physicians. The results of this study suggest that hospitals prefer to own the
property and buildings of their off-site facilities, rather than leasing the office space.
However, based on the results of cost benefit analysis, it is not always financially viable
for the hospital to own the clinic property and building. In these types of cases, it is best
for the hospital to make a leasing arrangement with the owner of the building, yet be
solely responsible for the staffing and operations of the clinic. While this study does not

---

Physical Therapy Breakeven Analysis 10
directly address the set up of a rehabilitation clinic, it does provide useful considerations
that should be made when moving services off-site (Advisory Board Company, Business
Models, 2002).

The relocation of hospital services to off-site medical buildings is often most
beneficial to the hospital due to the increased revenue opportunity from inpatient
services. Initial relocation of the service requires major capital expenses with potential
long-term financial rewards. Like many studies have suggested, the development of off-
site clinics can cause rapid growth in patient volumes. In addition, these new patient
visits also create a new referral base for hospital inpatient services. In a study conducted
at two competing hospitals, Sands and Rendina compare the financial benefits of
developing medical office buildings for each of these hospitals (Sands & Rendina, 1992).
The first hospital examined was a for-profit hospital with a competing hospital located
approximately three miles away. This facility is an urban, not-for-profit hospital. Sands
and Rendina’s analysis show that the not-for-profit hospital was the first to benefit from
the development of the medical office building. This hospital began to realize large
increases in referrals from physicians. These additional referrals generated nearly $2.2
million of revenue increases for the hospital in the first year after development. In this
study, the hospital constructed a medical office building in order to lease space to
independent physicians. In an urban setting, each physician generates an estimated 130
admissions per year, with estimated revenue to the hospital of $550,000 per referring
physician. Local physicians were responsible for half of all referrals to the hospital.
Following the opening of the medical office building, administrators believed it would be
realistic to assume that the number of referrals to the hospital would increase by 50

---