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

Payer Number of Average Revenue Variable Cost

Admissions per Admission per Admission

PennCare 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. Using the profit/loss format from our textbook and PowerPoints in this module, determine the hospitals net income, therefore showing your work to demonstrate how you got to the net income answer.

b. Assume that half of the 100,000 covered lives in the commercial payer group (above) will be moved into a capitated 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 (what you calculated above)?

c. What overall net income would be produced if the admission rate of the capitated group (from part B above) were reduced from the commercial level (originally listed as $2,500 total from above) by 10 percent?

d. For this same capitated group, assuming that utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for this same capitated group were lowered to $2,200 (from the original $2,500 listed above)?