7.4 Assume that Valley Forge Hospital has only the following three payer groups:

Payer Number of Admissions Average Revenue per Admission Variable Cost per Admission

Penn Care 1,000 $5,000 $3,000

Medicare 4,000 $4,500 $4,000

Commercial 8,000 $7,000 $2,500

The hospitals fixed costs are $38 million.

A. What is the hospitals net income?

B. Assume that half of the 100,000 covered lives in the commercial payer group will be moved into a capitated plan. All utilization and cost data remain the same. What PMPM rate will the hospital have to change to retain its Part a net income?

C. What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent?

D. Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitated group were lowered to $2,200?