cambridgetransplant center, marginal cost pricing analysis

Cases in Healthcare Finance Case Questions CASE 9 QUESTIONS CAMBRIDGE TRANSPLANT CENTER Marginal Cost Pricing Analysis 1. What is the estimate of the marginal cost of the Phase 4 hospital services? (Assume, as given in the case, that 60 percent of the designated costs are fixed and the remaining costs are variable.) 2. Create the underlying cost structure (cost behavior) equation. What is the relevant range for this structure? Does the structure change if the contract is expected to bring more than 30 additional transplant patients? 3. What fixed cost proportion is required to force the average variable cost for Phase 4 hospital services to be $90,000? 4. Now assume that the fixed cost proportion is only 50 percent. What price must be set to cover variable costs? What if the fixed cost proportion is 70 percent? 5. Return to the original assumption (60/40) regarding fixed cost percentages. How do contract costs change if additional fixed costs are required when contract volume exceeds 30? Assume first that fixed costs increase by 15 percent, then assume 20 percent, and finally 25 percent. When answering this question, assume contract volumes of 31 and 60. 6. What role do the following factors play in the decision as to whether or not to use marginal cost pricing on the new contract? a. Reimbursement amounts paid by current transplant third-party payers. b. The amount of excess capacity in the transplant unit. 7. What is your final recommendation regarding the base rate for Phase 4 hospital services that should be built into the contract? When answering this question, be sure to consider (1) a longterm pricing strategy and (2) the impact of the contract on current payers, who are paying roughly $140,000 for the services. 8. Now consider the outlier problem. a. What methodology should be used to handle outlier reimbursement? b. What threshold amount should be included in the contract? c. What payment amount should be included after the threshold is reached? 9. In your opinion, what are three key learning points from this case