A hospital just can’t afford to operate a department at 50 percent capacity. If we average 20 dialysis patients, it costs us $425 per treatment, and we’re only paid $250. If a department can’t cover its costs, including a fair share of overhead, it isn’t self-sufficient and I don’t think we should carry it.
Peter Lawrence, M.D., Director of Specialty Services at Lakeside Hospital, was addressing James Newell, M.D., Chief Nephrologist of Lakeside’s Renal Division, concerning a change in Medicare’s payment policies for hemodialysis treatments. Recently, Medicare had begun paying independent dialysis clinics for standard dialysis treatments, and the change in policy had caused patient volume in Lakeside’s dialysis unit to decrease to about 50 percent of capacity, producing a corresponding increase in per-treatment costs. By February of the current fiscal year, Dr. Lawrence and Lakeside’s Medical Director were considering closing the hospital’s dialysis unit.
Dr. Newell, who had been Chief Nephrologist since he’d helped establish the unit, was opposed to closing it. Although he was impressed by the quality of care that independent centers offered, he was convinced that Lakeside’s unit was necessary for providing back-up and emergency services for the outpatient centers, as well as for treatment for some of the hospital’s seriously ill inpatients. Furthermore, although the unit could not achieve the low costs of the independent centers, he disagreed with Dr. Lawrence’s cost figure of $425 per treatment. He resolved to prepare his own cost analysis for their next meeting.
Approximately twenty years ago, at Dr. Newell’s initiative, Lakeside had opened the dialysis unit, largely in response to the growing number of patients with chronic kidney disease. The hospital’s renal division had long provided acute renal failure care and kidney transplants, but the the most common treatment for end-stage renal disease was hemodialysis. During dialysis, a portion of a patient’s blood circulates through an artificial kidney machine and is cleansed of waste products. Used three times a week for 4 to 5 hours, the kidney machine allows people with chronic kidney disease to lead almost normal lives.
Lakeside’s dialysis unit had 14 artificial kidney machines. Because of space limitations, they used only 10 at any one time, reserving the other four for breakdowns and emergencies. Open six days a week with two shifts of patients daily, the unit could provide 120 treatments a week, which meant they could accommodate 40 regular patients.
From 1973, the year that Medicare began reimbursing for dialysis, all dialysis patients at Lakeside had been covered by Medicare. Until recently, the unit had been operating at almost 100 percent capacity, even extending its hours to accept emergency cases and to avoid turning away patients. . . .
- What is the breakeven volume for the dialysis unit? What assumptions are necessary for calculating it?
- What is a fair share of overhead at the current level of activity in the unit?
- What will happen to total costs and revenues at Lakeside if the dialysis unit is closed? What other options are available and what are their financial consequences?
- What should Dr. Newell do?
- What should Dr. Lawrence do?