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HADM 6506 Business Case Analysis #A: Nesser Spinal Surgery Specialty Practice
Dr. Nesser has a very successful spinal surgery practice, which she established in 2001. Her practice is housed in the Physician’s Pavilion adjacent to the hospital in which she performs her surgeries, Schertz General Hospital. Her practice has grown to caring for over 10,000 patients a year. In 2010, Dr. Nesser hired a second surgeon, Dr. Raymond. He graduated from his military residency in 2003 and gained vast experience and skill working with wounded warriors until he left the service to join Dr. Nesser’s practice. Dr. Nesser hired a practice manager, Ms. Delay in 2010 as well. Ms. Delay is responsible for the day-to-day operations of the business, including the accounting and finance activities. Each quarter she updates the budget for the next 12-month period and at that time she always conducts variance analysis of the previous 12 months.
Dr. Nesser’s practice has been very successful, both in reputation for quality care and in profits. However, this past year came with some unique challenges. Dr. Raymond broke his wrist while snow skiing in the Alps and following surgery he was unable to conduct surgery for three months while his hand healed. Luckily, he had a full recovery and was able to return to full duty in October of this year. Ms. Delay had adjusted the practice schedule to compensate for the time Dr. Raymond was out and then for the period of time where he couldn’t perform surgeries. Dr. Raymond usually takes the bulk of the Medicare patients so she did not accept any new Medicare patients during his down time. As she prepares to do her quarterly update to the annual budget, she anticipates she will find they’ve experienced a loss in revenues as a result. However, she is not concerned because Dr. Raymond is back performing surgeries, thus she anticipates the next quarter will rebound back to normal.
Ms. Delay had a new venture to cost out for Dr. Nesser. Dr. Nesser is considering contracting with a new payer, Aetna, to provide surgical services for their insured members. They are known to pay more than both Medicare and TRICARE and before she accepts an offer from them, she wants to have a better understanding of the practices costs, prices, and profits for each type of payer and service. She anticipates shifting about 1/3 of their normal visits/surgeries to Aetna and then reducing the patient load from either TRICARE or Medicare, depending upon whoever pays the least. Medicare has recently dropped their reimbursement rates and TRICARE has traditionally paid less than Medicare. If all goes well with the new contract, Dr. Nesser may be expanding the practice to include a third surgeon.
One other piece of business needs to be addressed this quarter as well. That is their leasing agreement with Schertz General Hospital for their office space in the Physician’s Pavilion. While it is convenient for the surgeons to be so close to the hospital to conduct their surgeries, their associated rent, utilities, and housekeeping charges have increased and are expected to increase another 10% next year. Additionally, their current space would not support an additional provider. Dr. Nesser’s lease agreement expires in 6 months and this may be the time to relocate.
Just as Ms. Delay was getting ready to run the variance analysis to update their budgets and proforma profit and loss statement, her father was hospitalized, and she had to return to Missouri to care for her mother in his absence. Luckily, she had you, an MHA student performing your graduate assistantship with her, to pick up where she left off. She left you with the following tasks:

  1. Using the data provided, prepare the Static Proforma profit and loss statement and the Actual Profit and Lost Statement for the period of October 2016 to September 2017.
  2. Conduct variance analysis by preparing a flexible budget using the static budget and the actual results.
  3. Using the data provided, cost out the practice’s services using activity-based costing to determine the actual costs per type of visit and surgical procedure. Determine the amount of profit the practice is making off each type of visit and procedure.
  4. Ms. Delay believes the practice is in a position to be a price setter with Aetna and as such, she has indicated you should establish pricing for each of the visit types at 20% above cost and the procedure types at 250% above cost. She indicated this would give them a good spot from which to negotiate.
  5. Prepare a management report (in MS Word, narrative form, and well-written) with your recommendations for Dr. Nesser, addressing the following points:
    1. Your findings from the variance analysis and the reasons why their profits were so much lower than forecasted.
    2. Your findings from your activity based-costing.
    3. The proposed pricing for the AETNA contract based upon Ms. Delay’s instructions and any recommendations you may have regarding the pricing.
    4. Your overall recommendations for improvements to the practice based upon your analysis and the practice’s situation. Include areas you would recommend require further research.

The practice consists of Medicare and TRICARE patients only, usually a 60/40 split, respectively. Additionally, the surgeons specialize in two types of procedures: Anterior Cervical Discectomy and Fusion (CPT code 22551) and Arthrodesis Anterior Interbody Lumbar (CPT code 22558). Typically, they do about the same amount of each procedure type each year. Patients initial evaluation upon referral to them is charged at the new patient visit rate (Evaluation & Management (EM) Code 99203) and all other return visits are charged at the established patient visit rate (EM Code 99213). As expected, only a small percentage of new patient visits result in surgery. However, this has been a growing concern for the practice, so much so, Dr. Nesser is now requiring the referring providers to obtain an initial MRI screen prior to referring a patient.
On average, between the two surgeons, they see 20 new patient visits and 24 established visits per day. Two days per week are reserved for conducting the surgeries at the hospital and the remaining three days are for outpatient visits at their office. The surgeons work 48 weeks out of the year (the entire office is closed for two weeks during the Christmas/New Year’s holiday break) and the surgeons take an additional two weeks of vacation at different times throughout the year. Each of the two-clinical staff earn $30 per hour, usually work 40 hours per week, but do earn time and a half for overtime past 40 hours/week, and they do not receive vacation time pay (i.e., the 2 weeks at Christmas are non-paid vacation; however, they do receive a Christmas bonus each year depending upon the practice’s profits). Ms. Delay is especially concerned about providing Christmas bonuses this year, another reason for completing the analysis quickly. Generally, Dr. Nesser distributes 3% of the profits (after tax) as Christmas bonuses across all of the employees. The practice’s tax rate is 30%. The practice consists of only one nurse practitioner, two clinical staff, and three administrative staff, so the bonuses are usually quite high on a per person basis. The second surgeon also shares in the bonuses.
Ms. Delay did leave you an Excel file that contains the data you need to complete the designated tasks. You are excited to get started, especially since Ms. Delay informed you that Dr. Nesser is very impressed with your work and is planning to include you in the Christmas bonus distribution this year!

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