Rehabilitation Center

Question:

Your client is a not-for-profit firm. It owns and manages a national chain of rehabilitation centers that provide health care services to the elderly. The last two years have seen a decline in profitability in the existing business, and the firm is seeking new growth opportunities to offset this trend.

Since profits are declining, it is worthwhile to reevaluate? Ask.

Candidate: What is our current business model?

Interviewer:  The current model often includes overnight stays of one or several days.

Candidate: So it sounds like our patients aren’t suffering any severe illnesses.

Interviewer: No, our patients do not suffer from life-threatening illnesses. They are patients who need rehabilitation. We also get patients who have been discharged from the hospital but need more nurturing and care than their families can give them.

You should determine what’s driving up costs.

Candidate: Tell me about the firm’s expenses

Interviewer: The cost of providing overnight accommodation is significant in the current business model.

Day care is an increasingly important part of elder care. Investigate this possibility.

This would prevent the expenses of overnight stays.

Candidate: Have you considered converting the chain to day care, as opposed to long-term stays?

Interviewer: In fact, the client has been considering such a change. How would you advise your client to proceed? What are the issues that they must consider?

Good for you. The interviewer has been driving towards this point. But first, make sure that you understand what you’re supposed to accomplish.

Candidate: I would like to clarify the primary objective of the firm. Shall I assume that profitability is a key objective, even though the firm is a not-for-profit?

This is important to clarify upfront, since the interviewer mentions that this is a not-for-profit firm. It could be that the organization has other objectives, such as increasing the number of clients served.

Interviewer: Yes, focus on reversing the declining profit trend.

Candidate: Is the firm considering changing the business model in all, or some of, its existing rehab centers? Or is the proposed model a new venture?

Interviewer: I’m glad you asked that. The company does not intend to transform existing rehab centers. Rather it intends to establish new centers using the proposed day care model.

This is an important indication that the interviewer wants you to evaluate the feasibility of a new model. It implies that you don’t need to evaluate the existing model, but structure the discussion towards the new model.

Candidate: Well, here is how I would like to structure the discussion going forward. First, I would like to assess the market opportunity and determine the viability of this new business model. Second, if the new venture is found to be feasible, I would like to assess the firm’s capabilities and resources in proceeding with it. Finally, I will make a recommendation based on the facts and the discussion we will have.

It’s useful to frame the structure of the discussion upfront. Take a few moments before you do this, and make sure you’ve considered, at least broadly, all the issues you want to address. This exercise also gives you an agenda for the case analysis and demonstrates clear thinking. Once you have done this, you can begin to ask questions about each agenda item.

Interviewer: Sounds good.

Candidate: Could you please tell me a little about the rehab center industry, and especially the markets in which our client operates?

Interviewer: The elderly clientele generally uses rehab centers as they recover from an illness. Our client is one of the largest firms in the industry. The competition essentially follows a similar business model, providing health care and nursing services, including overnight stays. The average rehab center has 100 beds.

The interviewer is providing you with some information, but is probably holding some back as well. Use this as a clue to keep asking questions until you feel cyou have enough information to make hypotheses.

Candidate: What are the revenue streams?

In a business, the “topline,” or where the revenues come from, is a very important issue. The answer to this will put you at ease that the company has thought about this issue and has identified a customer base, which you should explore next.

Interviewer: Revenue streams accrue primarily from medical services provided.

Candidate:Who pays – the patient or insurance?

Interviewer: Payments are made by third party payors, such as Medicare, PPOs and so on.

Candidate: What is the typical consumer profile?

Interviewer: Why don’t you take a crack at constructing a consumer profile for me?

Interviewers often answer questions with questions. Don’t be alarmed. Often they’re saying that you have enough information to hazard a guess yourself.

Candidate: I would expect that typical users of these centers fit the following profile: over 60 years old, recently undergone some major surgery or other medical procedure, typically with a medium to long post-surgical recovery period during which some medical oversight is necessary.

Interviewer: That’s about right.

Candidate: What attempts have been made by our client to assess the financial feasibility of a day care rehab center?

After you’ve determined that there are customers who would find this service useful, and that revenues can be realized, the next step is to consider the costs. The financial feasibility brings together both revenues and costs and is a good starting point to do the numbers.

Interviewer: A pilot center was, in fact, constructed in a suburb of Chicago.

Here are the results from that study:

Screenshot_2017-07-02-00-04-22.png

You see the numbers, but you want to make sure that you can base your judgments on them, and that the numbers will not change if the scale changes. Since these are the results of a pilot center, you really don’t know what an entire business built on this concept will look like. You must clarify these doubts.

Candidate: Well, it’s certainly heartening to see that the largest segment (the PPO) has the highest profit margin. I would, however, like to ascertain if these numbers are representative of a potential national, or even regional, rollout of day care rehab centers. In other words, is there any reason to believe that profit margins might increase as a result of scale? Or that the relative sizes of the four segments at the pilot might differ from the market as a whole?

Interviewer: No, and no to both your questions. Our client has reason to believe that the segment sizes and profitability at the pilot is accurate of the business at large. At this point, could you sum up for me the various issues that our client must consider to assess the market opportunity?

This is the interviewer asking for your hypothesis. It’s a signal that he feels that you now have enough information to construct a hypothesis. Take a few minutes to gather your thoughts, revisit the facts you have gathered and then answer his question.

Candidate: Yes, certainly. The market opportunity assessment must consider all of the following factors.

  • Target payor type segment: Only two payor segments are profitable: PPO and Others – it is these that the client must target. What is the total size, and growth rates, of these segments?
  • Customer segment: The client must profile the typical consumers who would benefit from day care rehab centers. The advertising and promotion strategy would depend on this.
  • Location: Choice of location for individual centers must be made based on concentrations of the targeted customer segment (downtown vs. suburbs etc.). In addition, it is important to look at various regions to determine a national rollout sequence.
  • Cannibalization: There is a possibility that some of the existing business might decline as a result of this new day care product offering; it is important to consider this.
  • Competition: It would be useful to assess competitive responses to this new venture.
  • Financials: Finally, all of the above must be consolidated into a forecast of financial feasibility, in order to determine the attractiveness of this new venture.

Interviewer: Good. What else would you consider?

It is not enough to determine feasibility of a project; it’s important to determine if an organization has the resources to capitalize on it. This is a good choice for what you should explore next.

Candidate: Assuming that the financial assessment of the venture is positive, I would also like to consider our client’s internal resources and capabilities to proceed with it, including financing options.

Interviewer: Actually, the firm is considering various options, such as spinning it off as a new business and obtaining venture capital funding. What do you think of this plan?

Candidate: If the primary constraint is financing, a spin-off may be appropriate. However, the disadvantages of a spin-off would be substantial. The new company may not have access to the current management and its experience in the industry. There may be other synergies in purchasing, operations, training, or marketing that may not be available to the new company. On the other hand, there are benefits of a spin-off as well: management’s attention would not be diluted, and the risks of a new venture would not impact the existing business.

Interviewer: What would you recommend?

Don’t be afraid to make a stand. Weigh the options and present an argument in favor of your recommendation. Often there is no right answer.

Candidate: Our client should make the decision based on its assessment of the advantages and disadvantages of a spin-off versus an internal division. I imagine that keeping the project in-house might actually be more valuable, given the synergistic benefits.

Interviewer: Assuming the outcome of the financial feasibility forecast was positive, what would your final recommendation be?

Candidate: I would recommend that our client proceed with the day care rehab centers, beginning with those locations that have the highest concentrations of our target customer group, and lowest current penetration. In addition, the firm should fully exploit its experience in this industry and leverage all possible synergistic benefits. Finally, I would recommend that the project be carried out in-house, rather than being spun off, provided it is possible to raise the necessary funding at reasonable rates.

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