HCA 125 Module 8 assignment: case study with a financial recommendation, a full sample

Four Beds, Half Empty: Should a Hospital Close, Keep, or Remake Its Sleep Center as Home Testing Takes Its Patients?

Student Name

Health Care Administration Program, Aspen University

HCA 125: Healthcare Finance

Instructor Name

Month Day, Year

Four Beds, Half Empty: Should a Hospital Close, Keep, or Remake Its Sleep Center as Home Testing Takes Its Patients?

Healthcare services rarely fail suddenly; more often, the way care is delivered changes and a service built for the old way slowly loses money. This case concerns the sleep center at Cedar Ridge Hospital, a composite community hospital. The center has four overnight beds, but its in-laboratory studies have fallen from 1,150 to 780 a year over three years as payers require home testing first for uncomplicated patients. The center lost $171,600 last year. This paper explains the change in demand, prices three options on the same basis, weighs the clinical evidence, and makes a recommendation.

What Changed

Obstructive sleep apnea used to be diagnosed almost entirely by overnight polysomnography in a laboratory, attended by a technologist. Home sleep apnea testing uses a simpler device the patient wears at home. The American Academy of Sleep Medicine's guideline states that either polysomnography or a technically adequate home test can be used to diagnose obstructive sleep apnea in uncomplicated adults with signs and symptoms suggesting moderate to severe disease, while polysomnography is recommended for patients with significant heart or lung disease, certain neuromuscular conditions, and other complicating factors (Kapur et al., 2017). Payers have followed that guidance, so the lab now sees mainly complex patients, and many of its beds sit empty.

Current Finances

Each in-laboratory study brings about $900 in net revenue and $120 in variable costs, a contribution margin of $780. The center's fixed costs are $780,000 a year: $520,000 for night-shift technologists, $110,000 for space and equipment, $90,000 for the medical director, and $60,000 for scoring and administration. At 780 studies, contribution is $608,400 and the center loses $171,600. With four beds six nights a week, capacity is about 1,248 studies, so the lab is running at about 63 percent. The lab's costs are sized for the volume it used to have, not the volume it has.

Option A: Close the Center

Closing removes the $608,400 contribution along with most fixed costs, but not all. The space cannot be rented out or repurposed for at least two years, leaving about $70,000 in stranded costs. The center also refers patients to the hospital's ENT, bariatric, and cardiology services; finance estimates those downstream referrals contribute about $100,000 a year, which would likely go to the competing system that absorbs the sleep patients. The result of closure is a loss of about $170,000, almost exactly the current loss. Closing would remove a service without improving the hospital's finances.

Option B: Remake the Center

The second option shrinks the lab to two beds five nights a week, about 520 studies of capacity, for the complex patients who need in-laboratory testing, and adds a home testing program for uncomplicated patients referred by the hospital's own clinicians. The lab is projected to perform 480 in-laboratory studies and 900 home tests a year. Home tests bring about $190 in net revenue and $55 in variable costs for disposables and scoring, a $135 margin. Fixed costs fall to $535,000: $280,000 for technologists, $70,000 for space and equipment, $90,000 for the medical director, $85,000 for scoring and administration, and $10,000 a year in depreciation for 20 home testing devices costing $50,000. Contribution totals $495,900, for a loss of about $39,100.

The option depends on volume. If home tests reached only 600, the loss would be about $79,600; if in-laboratory studies fell to 400, about $101,500. Both are still better than the current position or closure.

Option C: Keep the Center As Is

Doing nothing preserves the current loss of $171,600 and likely worsens it, as payer rules continue to move uncomplicated patients to home testing. It is included only to show the cost of inaction.

Clinical Evidence for Home Testing

The remake option is sound only if home testing serves patients well. In a randomized trial at seven accredited sleep centers, patients with a high probability of moderate to severe obstructive sleep apnea were assigned either to home testing followed by home autotitrating positive airway pressure or to laboratory testing. The home pathway was not inferior in treatment acceptance, time to treatment, or functional improvement, and nightly CPAP use at three months was about an hour greater in the home group (Rosen et al., 2012). The evidence supports offering home testing to appropriate patients, and the guideline supports keeping in-laboratory testing for complex ones, which is exactly the structure of Option B.

Implementation Risks

The remake carries risks the numbers do not show. Reducing night staff from four beds' worth to two means some technologists will lose hours, and the center could lose experienced staff it needs for complex studies; offering them roles in scoring home tests or in daytime testing would soften the change. Home devices can be lost or returned with failed recordings, which adds repeat tests and costs, so the program should track its failure rate from the first month. Referring clinicians must also learn which patients belong in the lab and which can be tested at home, which calls for a simple referral guide based on the guideline's criteria. Each of these risks is manageable, but each should be named in the implementation plan with an owner.

Recommendation

Cedar Ridge should remake its sleep center: reduce the lab to two beds five nights a week, launch a home testing program with 20 devices, and keep in-laboratory testing for complex patients. The option reduces the loss from $171,600 to about $39,100, keeps downstream referrals, and matches current clinical guidance. Closure would save almost nothing and remove a service. Management should review results after 12 months, and if home test volume stays below 600 and the loss exceeds $100,000, reconsider a partnership with a regional sleep program. The hospital might also accept a small loss on this service, as it does for others, if it protects referrals and keeps care local, but the analysis shows that most of the loss can be removed without that choice (Reiter & Song, 2021).

Conclusion

Cedar Ridge's sleep center loses money because its costs are sized for a way of diagnosing sleep apnea that payers and guidelines have moved away from. Closing it would save little once stranded costs and lost referrals are counted. Remaking it around home testing, with a smaller lab for complex patients, cuts the loss by more than three-quarters and follows the clinical evidence. The case shows why a declining service should be priced against its alternatives rather than judged by its own loss alone.

References

Kapur, V. K., Auckley, D. H., Chowdhuri, S., Kuhlmann, D. C., Mehra, R., Ramar, K., & Harrod, C. G. (2017). Clinical practice guideline for diagnostic testing for adult obstructive sleep apnea: An American Academy of Sleep Medicine clinical practice guideline. Journal of Clinical Sleep Medicine, 13(3), 479-504. https://doi.org/10.5664/jcsm.6506

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.

Rosen, C. L., Auckley, D., Benca, R., Foldvary-Schaefer, N., Iber, C., Kapur, V., Rueschman, M., Zee, P., & Redline, S. (2012). A multisite randomized trial of portable sleep studies and positive airway pressure autotitration versus laboratory-based polysomnography for the diagnosis and treatment of obstructive sleep apnea: The HomePAP study. Sleep, 35(6), 757-767. https://doi.org/10.5665/sleep.1870