7.4 Assume that Valley Forge Hospital has only the following 3 payer groups:

# of Admissions Avg. revenue per admission Variable cost per admission

Commercial 1,000 $5,000 $3,000

Penn Care 4,000 $4,500 $4,000

Medicare 8,000 $7,000 $2,500

The hospitals fixed costs are $38 million.

1. What is the hospitals net income?

Hospital Net Income=Revenuecostfixed cost

=1000x (5,0003,000)+ 4,000 (4,5004,000)+ 8,000 (7,0002,500)- $38 million

Net Income=2,000,000

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

3. What overall net income would be produced if the admission rate of the capitation group were reduced from the commercial level by 10%?

4. 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?

(Please answer questions 2,3, and 4 and show your work)