Highland Medical Center

Highland Medical Center (HMC) operates a general hospital that leases beds and support services to independently managed specialty units, including Pediatrics. The Pediatrics Unit pays HMC for services such as dietary support, laundry, laboratory services, billing, administration, and rent, while directly managing its own staffing costs. Despite operating with a fixed capacity of 60 beds, the unit experienced excess demand on 258 days during the year, frequently turning away patients because all beds were occupied. Administrators suspect that the existing capacity level was chosen years ago without rigorous analysis, even as patient demand has steadily increased over time.

The case asks students to apply cost-volume-profit (CVP) analysis to calculate break-even patient-days, distinguish between fixed and variable costs, and evaluate the financial implications of operational decisions. Students then model patient demand using a Poisson distribution and perform numerical simulations to estimate annual patient-days, excess demand, and profitability under alternative capacity levels. By comparing profits across different bed capacities, students identify the capacity level that maximizes expected profit while accounting for demand uncertainty and operational limitations.

In the final section, the case introduces labor constraints through union-mandated staffing requirements that increase personnel costs once annual patient-days exceed a specified threshold. Students must revisit their earlier optimization analysis to determine how higher staffing levels affect the Pediatrics Unit’s optimal capacity decision and overall profitability. The case integrates managerial accounting, operations management, and simulation modeling to illustrate how healthcare organizations make capacity and staffing decisions under uncertainty.