Case Study 2: Shouldice Hospital Kenneth Snell, David Drummond

1. How successful is the Shouldice Hospital? a. Perform a comparison of the cost to patients at Shouldice vs other Hospitals The cost to a patient at Shouldice is based on an average 3.5 day stay: ($320.00/day x 3.5 days) = $1120.00 $650.00 surgical fee $300 anesthesia fee (20% of the patients) = 300 x .2 = $60.00 Average cost to patient is $1120.00 + $650.00 + $60.00 = $1830.00 Average charge for operations performed at other facilities: $5,240.00 b. Perform an analysis of the profitability of the operation at Shouldice. Include Return on Investment (7,600 patients/year) x $1120.00/patient = $13,908.00 annually Operating budget for the clinic: $3.5M Operating budget for the hospital: $8.5M Estimated annual net income: $13.9M - $12M = $1.908M *Net income is the numerator for any return calculation, and typically shareholder’s equity and total assets would be in the denominator. Since insufficient data was given to estimate total INVESTED CAPITAL in this business, ROI cannot be effectively calculated. c. How is all this achieved? How do you account for this performance? The keys to financial success for the hospital is that Shouldice manages its expenses to reduce overhead costs through allowing patients to be active participants in the service delivery process, reducing the need for a large nursing staff. As an example, Shouldice employs 1 nurse for every 15 patients at the facility; however, acute care hospitals average around 1 nurse for every 4 patients. Additionally, since the average flow time for each patient is only 3.5 days, this further reduces the need/cost for housekeeping staff .

2. The hospital offers only one “product”. What are the implications of this single product offering? Shouldice is highly successful with its current strategy of maintaining one “product” offering that matches its structure; however, there are some inherent implications of operating a treatment facility with an emphasis in one area of medicine. Although the Shouldice method has been idealized as being superior to conventional surgical methods, the fact is that specialized medicine has advanced over the last several decades (the Shouldice method was first introduced circa 1940) and it may be only a matter of time before superior methods are developed that would render the Shouldice method obsolete. Given that, the current facility would be in jeopardy of losing potential clientele (patients) and would not have a concrete business plan set in place to regain its market share. Secondly, Shouldice does run the risk of losing business due to its method and system of operations being replicated by other facilities and doctors. Potentially, medical professionals can be trained in the technique and are not bound to any type of non-disclosure contract. In effect, the professional training a surgeon receives at Shouldice could be leveraged at competing facilities, and this could negatively impact operations due lost potential business. Moreover, the implication is that if Shouldice loses future business to the competition either through improved processes or replication of their current process, there is no way they can fall back on alternate forms of revenue because there are no other services offered to potential clientele.

3. Using activity times given in the case, compute the weekly capacity (patients per week) of the following resources: a. Examination Rooms [6 rooms x 3hrs (1-4pm) x 5 days x 60 min/hr]/(20 min/exam) = 270 patients/week b. Admitting Procedure [2 people x 4hrs (1-5pm) x 5 days x 60 min/hr]/(10min/patient) = 240 patients/week c. Nurses Station [2 stations x 4hrs (1-5pm) x 5 days x 60min/hr]/(10min/patient) = 240 patients/week d. Operating room 5 operating rooms x 7.5 hrs/day x 1hr/patient x 5 days = 188 patients e. Doctors 10 surgeons x 3.5 operations/day x 5 days = 175 patients f. Rooms [44.5 x 5 day/week]/3.5 day average = 64 patients. Since there are 2 beds per room: 64 x 2 = 128 patients (this is where the bottleneck occurs)

Use average time per patient when there is variability in the time. Consider the existing policies of the hospital (patients arrive only on 5 days of the week for example). State any assumptions you may need to make.

4. Shouldice is currently processing about 7600 patients per year, or about 146 per week on average. What resource is keeping Shouldice from increasing the throughput rate (from 146 per week to a larger number)? In other words, what is the bottleneck resource? Develop a day-to-day weekly room capacity schedule under the following assumptions: ***as stated above, the current number of rooms/beds is the bottleneck resource***

a. Use of 89 beds, 3.5 day average stay

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b. Use of 89 beds plus 14 “hostel” rooms, 3.5 day average stay

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c. Use of 89 beds, plus 14 “hostel” rooms, 3 day average stay

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d. Use of 134 beds (with new 45-bed addition), 3.5 average stay

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e. Use of 89 beds only, 3.5 day average stay, scheduling of Saturday operations

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f. Use of 89 beds plus 14 “hostel” rooms, 3.5 day average stay, scheduling of Saturday operations

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5. Evaluate the following four expansion options from both a capacity and profitability perspective and provide management with an expansion recommendation:

a. Add 45 more Hospital beds

• Total number of beds will increase from 89 to 134 • Total number of patients will increase to 193/week • Current throughput is 128/ theoretical throughput 148 • New throughput: 193 x 126/148 = 164 • Additional patients per year (164-128) x 50 wks per year = 1800 additional patients • Additional revenue for the clinic: 1800 x $1830.00 = $3.294M

The disadvantages are that the hospital will be forced to schedule all surgeons to full capacity at five days per week (if no additional staff is hired). There will be an increased work load on the nursing staff in addition to the kitchen, laundry, and housekeeping staff. Recommendation: do not add additional hospital beds.

b. Schedule Saturday as an operating day

• Use 89 rooms at a 3.5 day average = 161 patients per week • Current throughput is 128/theoretical throughput 148 • New throughput: 161 x 126/148 = 137 • Additional patients per year (137 -128) x 50 wks per year = 450 additional patients • Additional revenue for clinic: 450 x $1830.00 = $823,500

The disadvantage is that the hospital would have to schedule operations on Saturday requiring at least 6 surgeons and 1 supervising surgeon. This is in direct opposition to the hospital’s implied contract with its employees. However, there is no investment needed to maintain a new schedule on Saturday and the hospital can still maintain the same standards and quality of service they current provide to their patients. Recommendation: schedule surgeries on Saturday

c. A second facility for treating Hernias

Advantages:

• Being able to build a second facility at a secondary location that would attract patients outside of Canada • This would improve Shouldice’s competitive position and increase profit margins • The potential to operate in a less restrictive environment • Additional opportunities for medical and non-medical staff • There would be a transfer of expertise and knowledge to the new facility • Additional facility could potentially double capacity

Disadvantages

• Second facility would require a substantial investment (Shouldice’s access to capital is not known) • Maintaining the same level of quality is not guaranteed • It would be extremely difficult to replicate the same culture and atmosphere as the existing facility • There would also be potential competition with the existing facility, lowering current throughput/profitability

*Overall the recommendation is to not invest in a second facility

d. A second facility for treating a different problem

Advantages

• Second facility would improve Shouldice’s competitive position • Treating a secondary problem would allow Shouldice to tap into a market that otherwise would not be available to them • The opportunity to increase referral networks through a secondary treatment option • Additional opportunities for current staff to increase expertise and knowledge in the medical profession • Treatment of an alternate problem would allow Shouldice to create a more solid business plan in the event it would have to shift emphasis due to market completion • Treating a secondary problem could strengthen Shouldice’s professional reputation • Increased capacity at an alternate location

Disadvantages

• Shouldice is risk adverse and expanding into an unknown secondary market is not a sound course of action • All surgeons are trained in one specialty, therefore Shouldice would have to invest the time, resources, and money into training a full time medical staff • Currently Shouldice is succeeding in a niche market due to the nature of the method of treatment and post-op recovery. It would be extremely difficult to replicate this in another area • Quality control could potentially be an issue, which in turn could impact Shouldice’s reputation • The investment would be costly with no guarantee of a return • Shouldice would not have the working capital to expand its current operation if needed (currently the company is facing a large backlog of patients)

*Recommendation: this is a high-risk investment that could potentially impact current operations. Do not expand into a secondary market.

6. How does Shouldice Compete? Shouldice Hospital competes by offering patients, suffering from hernias, with a highly specialized surgical technique, which produces superior results while maximizing efficiency.

Key Characteristics of Shouldice’s Operation:

Maximized Efficiency: Doctors could conduct 600 operations in a year as compared to 25 to 50 operations per year in other hospitals. This was possible due to the standardization of operating procedures. This standardization led to efficient utilization of the medical staff and other resources. To adhere to the Shouldice technique and match the value system with that of the hospital, experienced doctors and nursing staff were recruited carefully.

Patient Value Proposition: Shouldice’s specialized surgical technique allowed the hospital to generate significant value proposition for patients in the following ways:

1. Faster Recovery times: Shouldice’s specialized surgical technique procedure led to quicker recovery times as compared to the existing methods at other hospitals. Patients were able to resume their normal routine and jobs in a much shorter period of time (one to four weeks) as compared to other hospitals (two to eight weeks). 2. Minimized risks. The avoidance of general anesthesia minimized patient’s risks 3. Lower costs. Patients saved up to two thousand dollars by having their hernia operation performed at Shouldice rather than at other hospitals 4. Patient confidence. Shouldice’s excellent track record and its experienced and superiorly trained doctors nurses and staff in the areas of hernias instilled a high level of confidence for patients in need of this operation operation.

Significant Cost Advantages: 1. low nurse to patient ratios 2. fewer housekeepers 3. lower operating equipment costs than competing hospitals 4. No advertising and marketing costs helped keep costs low

How aggressively should Shouldice management act to preserve the hospital name?

The Shouldice name had begun to get tarnished by the competition replicating its technique with varying levels of success. Therefore, Shouldice should act aggressively toward preserving is hospital name. It should develop accreditation programs offering the same Shouldice training and standards with certificates rewarded for anyone who wished to use the Shouldice technique. The accreditation program should have fees associated for its membership and Shouldice inspectors should randomly inspect its members to ensure that operation standards are kept in line with Shouldice’s high requirements. This could ensure that greater quality control measures are in place.

Should Shouldice seek to increase its market share?

Yes it should seek to increase its market share. As previously mentioned, Shouldice should open Saturday operation hours. However, it would not be prudent to invest capital in expanding the Toronto building. A major issue that works against Shouldice is its location in Toronto. Competitors are using the Shouldice technique and could then advertise to patients that it can be done in locations closer to their residences. Therefore, Shouldice should strategically open offices in key states within the U.S in an effort to increase its market share. Additionally by doing so, it could potentially recruit skilled doctors, nurses, and staff who had been intrigued at working for Shouldice, but did not want to relocate to Toronto.

Shouldice should also increase its marketing efforts, instead of relying on word of mouth advertising.

There are 3 groups that Shouldice should specifically target:

1. Perspective Patients: provide perspective patients with detailed data showing the result rates and highlighting the benefits of choosing Shouldice such as lower costs and first class care support.

2. Primary Care Physicians: Shouldice should provide primary physicians with similar data and results, but with language geared toward the medical profession. For instance, Shouldice’s could market to primary care physicians by stating data that the gross recurrence rate for all hernia operations performed at Shouldice was 0.8% versus the gross recurrence rate in the U.S. of .10%.

Additionally, at the time of the case, 53% of Shouldice patients said that a friend referred them to that hospital. Only 21% of the patients said a physician referred them. Therefore, Shouldice should attempt to build rapport and develop relationships with primary care physicians. Typically primary care physicians have existing relations with general physicians, who handle hernia operations and do not want to lose business to Toronto. Still there are effective ways in which Shouldice can establish relationships with these primary care physicians. For each Shouldice patient, management at Shouldice could contact that patient’s primary care physician to provide updates of the patient’s status, deliver detailed description of that patient’s recovery process, and continue providing first class support to the primary physicians after the operation. Once a rapport with that physician has been established, Shouldice can then be a better position to ask for referrals from that primary physician.