CAMBRIDGE TRANSPLANT CENTER Harvard Case Solution & Analysis

CAMBRIDGE TRANSPLANT CENTER Case Solution

Introduction

Agreement on a transplant is quite complicated because of its well-defined procedures. It starts with an examination of the patient, then taking care of patient followed by purchasing of the required organ. Afterwards, surgery starts and the process here does not end. There is still a need of one year follow up. Cambridge transplant center is leading the region in transplant surgery. In last year, their specialists did over 500 surgeries. It is very costly because of incurring of cost at various stages of transplant surgery.

Josh Zimmerman was working for Cambridge since last ten years, and he was administrative director of the center. He is one of the people behind the sustainable growth of this center. Majority of their revenue was generated from liver transplant (120 surgeries last year).) Center was now looking to bring cost efficiency, which is why it was planning to outsource its transplant management to LTNET. This contract was supposed to be duly acknowledged by Dr. Anjali Desai, surgical director at the Center. As per the contract, the center had to reduce the cost for phase 4 (Surgery and attendant of inpatient stay) because average cost of the patient for this phase is $119,805 for 19 days length of stay.

It was quite difficult to estimate cost because of invariability and non-linear relationship between patients and cost. Now management was concerned about the average cost for the 12 recent patients, which $119,805. This cost is huge and with this cost, LINET is not going to sign a contract with the center. That is why the reduction of cost was a necessity for winning this contract successfully. One option to reduce the cost was to increase the number of transplants because marginal cost for each of them was lower.

Problem Statement:

Josh Zimmerman and Dr. Anjali Desai both were analyzing the cost structure for phase 4 of surgery. The cost of recent 12 employees was higher than their imagination. Hence, it was a challenge for them to come up with a plan, which signifies lower cost structure.

Average
Category Cost
Nursing $13,314
Ancillary 53,245
OR 5,906
Laboratory 8,097
Radiology 1,389
Drug 15,268
Other 22,586
Total $119,805

Table 1.0 Average cost source Case data

Historical cost is enormous and as per this cost, Cambridge transplant center will not be able to win services of LTNET. One option was to reduce the length of days stays, but this plan will not contribute to significant cost reduction because around 70% of phase 4 cost occurs within 24 hours. The relationship between the length of stay and the total cost was non-linear; it varies from patient to patient, as per their level of illness.

Economies of scale in liver transplant:

Category Existing  Fixed Costs
Nursing  $            7,988
Ancillary              31,947
OR                3,544
Laboratory                4,858
Radiology                       -
Drug                       -
Other                       -
  Total  $           48,337

 Another option for cost reduction was to use economies of scale. As per this plan, cost of phase 4 would be based on marginal (extra) rather than the whole cost. Around 60% of operating room, ancillary, laboratory, and nursing cost is fixed cost and rest of the costs are wholly variable.........................

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