Harvard Case - Schon Klinik: Measuring Cost and Value
"Schon Klinik: Measuring Cost and Value" Harvard business case study is written by Robert S. Kaplan, Mary L. Witkowski, Jessica A. Hohman. It deals with the challenges in the field of Finance. The case study is 22 page(s) long and it was first published on : Mar 16, 2012
At Fern Fort University, we recommend that Schon Klinik implement a comprehensive financial analysis framework to measure cost and value, focusing on activity-based costing and profitability analysis to understand the true cost of services and identify areas for improvement. This framework should be integrated with a strategic planning process to ensure that financial decisions align with the clinic's long-term goals.
2. Background
Schon Klinik is a leading German private hospital group facing increasing pressure to demonstrate the value of its services in a competitive healthcare market. The case study highlights the challenges of measuring cost and value in a complex healthcare setting where traditional cost accounting methods are inadequate.
The main protagonists are Dr. Bernhard Sch'lmerich, the CEO of Schon Klinik, and his team, who are tasked with finding a solution to accurately measure the cost and value of their services to improve profitability and demonstrate value to stakeholders.
3. Analysis of the Case Study
This case study presents a classic challenge faced by many healthcare organizations: the difficulty in accurately measuring the cost and value of complex services. Schon Klinik's current cost accounting system, based on department-level allocation, does not provide a clear picture of the true cost of individual services. This limits the clinic's ability to make informed decisions about pricing, resource allocation, and service development.
To address this challenge, we can utilize a strategic framework focusing on financial analysis, operations strategy, and profitability.
Financial Analysis:
- Activity-based costing (ABC): This approach allocates costs based on the actual activities involved in delivering each service. ABC can provide a more accurate picture of the true cost of each service by identifying the specific resources consumed, including staff time, equipment, and supplies.
- Profitability analysis: This involves analyzing the profitability of different services, patient segments, and treatment pathways. By understanding the profitability of each service, Schon Klinik can identify areas for improvement and prioritize investments in high-value services.
- Financial modeling: Developing financial models to simulate different scenarios and assess the impact of various decisions on the clinic's financial performance. This can be used to evaluate the financial viability of new services, assess the impact of pricing changes, and optimize resource allocation.
Operations Strategy:
- Process optimization: Identifying and streamlining processes to reduce waste and improve efficiency. This can involve analyzing the workflow, identifying bottlenecks, and implementing lean management principles.
- Technology adoption: Investing in technology to automate tasks, improve data management, and enhance patient care. This can include electronic health records, data analytics tools, and telemedicine platforms.
- Partnerships: Exploring strategic partnerships with other healthcare providers, technology companies, or research institutions to leverage complementary expertise and resources.
Profitability:
- Pricing strategy: Developing a pricing strategy that reflects the true value of services and ensures profitability. This may involve considering value-based pricing, bundled payments, or outcome-based contracts.
- Cost management: Implementing cost-containment measures to improve efficiency and reduce unnecessary expenses. This can involve negotiating better rates with suppliers, optimizing inventory management, and reducing administrative overhead.
4. Recommendations
- Implement Activity-Based Costing (ABC): Schon Klinik should implement a comprehensive ABC system to accurately measure the cost of each service. This will require identifying and tracking the specific activities involved in delivering each service, allocating costs to these activities, and calculating the cost per unit of service.
- Conduct Profitability Analysis: Analyze the profitability of different services, patient segments, and treatment pathways. This will help identify high-value services, areas for improvement, and opportunities for cost reduction.
- Develop Financial Models: Create financial models to simulate different scenarios and assess the impact of various decisions on the clinic's financial performance. This will enable informed decision-making regarding pricing, resource allocation, and service development.
- Optimize Operations: Implement process optimization initiatives to streamline workflows, reduce waste, and improve efficiency. This could involve adopting lean management principles, automating tasks, and investing in technology.
- Develop a Pricing Strategy: Develop a pricing strategy that reflects the true value of services and ensures profitability. This may involve considering value-based pricing, bundled payments, or outcome-based contracts.
- Implement Cost Management Measures: Implement cost-containment measures to improve efficiency and reduce unnecessary expenses. This could involve negotiating better rates with suppliers, optimizing inventory management, and reducing administrative overhead.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with Schon Klinik's mission to provide high-quality healthcare services while ensuring financial sustainability.
- External Customers and Internal Clients: The recommendations are designed to improve the value proposition for patients and enhance the efficiency of internal operations.
- Competitors: The recommendations are based on best practices in the healthcare industry and will help Schon Klinik stay competitive in a rapidly evolving market.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve profitability, increase efficiency, and enhance shareholder value.
6. Conclusion
By implementing a comprehensive financial analysis framework, Schon Klinik can accurately measure the cost and value of its services, identify areas for improvement, and demonstrate the value of its services to stakeholders. This will enable the clinic to make informed decisions about pricing, resource allocation, and service development, ensuring long-term financial sustainability and continued success in the competitive healthcare market.
7. Discussion
Alternative Options:
- Outsourcing: Schon Klinik could consider outsourcing certain non-core functions to reduce costs and improve efficiency.
- Mergers and Acquisitions: Schon Klinik could explore mergers or acquisitions to expand its reach and gain access to new markets and expertise.
Risks and Key Assumptions:
- Implementation Challenges: Implementing a new financial analysis framework and operational changes can be challenging and require significant resources.
- Resistance to Change: Some stakeholders may resist change, making it crucial to effectively communicate the benefits and address concerns.
- Data Accuracy: The success of ABC and profitability analysis depends on the accuracy of data collection and analysis.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Implement ABC | Accurate cost measurement, informed decision-making | Implementation costs, data accuracy, resistance to change |
| Conduct Profitability Analysis | Identify high-value services, areas for improvement | Data accuracy, resistance to change |
| Develop Financial Models | Simulate scenarios, assess impact of decisions | Complexity, reliance on accurate data |
| Optimize Operations | Improve efficiency, reduce waste | Implementation costs, resistance to change |
| Develop a Pricing Strategy | Reflect true value of services, ensure profitability | Market acceptance, competition |
| Implement Cost Management Measures | Improve efficiency, reduce expenses | Resistance to change, potential impact on quality |
8. Next Steps
- Form a Task Force: Establish a cross-functional task force to oversee the implementation of the financial analysis framework.
- Develop a Pilot Program: Conduct a pilot program to test the ABC system and profitability analysis in a specific department or service line.
- Train Staff: Provide training to staff on the new financial analysis framework and operational changes.
- Monitor Results: Regularly monitor the results of the implemented changes and make adjustments as needed.
- Communicate Progress: Communicate the progress of the implementation to stakeholders and address any concerns.
The implementation of these recommendations will require a commitment from Schon Klinik's leadership to invest in the necessary resources and support the change process. However, the potential benefits of improved financial performance, enhanced efficiency, and a stronger value proposition for patients make this a worthwhile investment for the clinic's future success.
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Case Description
The case illustrates how a leading German hospital group has invested deeply in the measurement of patient-level outcomes and costs, the foundations of a health care value framework. The company launches a pilot project to use time-driven activity-based costing (TDABC) for measuring the cost of total knee replacements. The costing project complements an existing initiative for comprehensive outcomes measurement. The combination of accurate measurement of outcomes and costs empowers local personnel - physicians, nurses, and administrators - to improve the value of care they deliver. It also permits benchmarking across the group's multiple hospital sites to identify best practices that can be shared. The case concludes with a decision on using outcome and cost measurement to inform the adoption of a new recuperative approach that promises to dramatically lower post-surgical length-of-stays.
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