HCMG750

Case Study: Breakeven Analysis/Pricing

Week 2

Points: 50

Use the information below to answer the questions that follow. Put your answers on a separate document and show your work

You are heading up a large multi-specialty group practice. There are four specialties in the group: Internal Medicine, General Surgery, Pediatrics, and OB-GYN. You anticipate a total of 12,500 patients per month between the four specialties.

The fixed costs for each specialty are listed in the table below:

Internal Medicine

General Surgery

Pediatrics

OB-GYN

Rent

1,000

1,500

1,200

1,400

Malpractice Insurance

2,000

2,750

2,100

3,250

Depreciation

900

1,500

1,000

950

Salaries (clerical and professional)

56,100

69,250

42,700

90,400

Total

60,000

75,000

47,000

96,000

The variable costs and estimated number of patients are as follows:

Speciality

Estimated # of Patients

Variable Costs

Int. Med.

5000

$35

Gen. Surg.

1875

$60

Peds.

3125

$40

OB-GYN

2500

$55

Total

12,500

1. Assume that you are looking at each specialty separately. What will each specialty have to charge in order to breakeven. (remember: charge is equivalent to price). (16)

1. You have been approached by an managed care corporation who wants to reimburse you as follows:

Specialty

Reimbursement Rate

Int. Med.

$42

Gen. Surg.

$110

Peds.

$55

OB-GYN

$95

1. Looking at each program separately, how many patients would you need to see in each service in order to break even if you accept the managed care company's offer? (remember: the reimbursement rate is equivalent to price) (8)

1. Would you accept the managed care company's offer? Why or why not? Keep in mind the behavior of fixed costs in your discussion. (10)

1. The malpractice insurance rate for OB-GYN is going up by 20% and their variable costs have risen to $64. In addition, their anticipated number of patients will decrease to 2000 due to the retirement of one of their physicians. You have been told that the customary rate for OB-GYN cannot exceed $100. Will this price allow your OB-GYN department to break even? Show your work. (6)

1. What strategies can you put in place in order to operate at a price of $100? (10)