Health care providers can lower their financial risk by matching the cost structure to the revenue structure. For example, providers that are primarily reimbursed on a fee-for-service basis can lower risk by converting as many fixed costs as possible to variable costs. Conversely, providers that are primarily reimbursed on a capitated basis can lower risk by converting variable costs to fixed costs.

Assume that you are the business manager of a large cardiology group practice. Virtually all of the practices revenues are paid on a fee-for-service basis. However, the practices two largest cost categories (labor and diagnostic equipment) are predominately fixed. You are concerned about the potential for volumes to fall in the future and want to take some actions to reduce the financial risk of the practice. (Taken from For Your Consideration on page 144 in your text)

What cost structure (fixed vs. variable costs) is optimal for the practice? How can labor costs be adjusted to improve the cost structure? How can equipment costs be adjusted? Suppose the change in cost structure will increase overall practice costs at next years expected volume. Does this fact influence your risk reduction actions?