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Chapter 7 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 7.1 Assume that the mangers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data: Part a Part b Part d $ 5.00 $ Annual direct fixed costs $ 500,000 $ Annual overhead allocation $ 50,000 $ 50,000 ### $ 50,000 10,000 10,000 ### 10,000 Expected annual utilization (visits) Target profit $ 100,000 $ 10.00 $ Part c Variable cost per visit 5.00 $ 10.00 500,000 $ 1,000,000 $ 1,000,000 100,000 ### $ 100,000 Price @ Breakeven Price @ $100,000 Target profit The breakeven formula is: (Price Volume) (VC rate Volume) Fixed costs = Profit Algebraically this breaks down to: Price = ((Profit+Fixed costs)/Volume) + Variable cost per visit a. What per visit price must be set for the service to break even? What per visit price must be set for the service to earn an annual profit of $100,000? Note: To break margin must equal fixed costs and fixed costs include both direct and indirect costs. Fill in blue shaded area above and use Excel formula for calculations. b. Repeat part a, but assume that the variable cost per visit is $10. Fill in blue shaded area above and use Excel formula for calculations. c. Repeat part a, but assume that direct fixed costs are $1,000,000. Fill in blue shaded area above and use Excel formula for calculations. d. Repeat part a assume both $10 in variable cost and $1,000,000 in direct fixed costs. Fill in blue shaded area above and use Excel formula for calculations. 1 MANAGEMENT, 6th ed profit of $100,000? Note: To break even the total contribution ormula for calculations. ations. ations. formula for calculations. 2 Chapter 7 Problem 7.3 Allied Laboratories is combining some of its most common tests into one price packages. One such package will contain three tests that have the following variable co Test A Test B Test C Disposable syringe $ 3.00 $ 3.00 ### Blood vial $ 0.50 $ 0.50 ### Forms $ 0.15 $ 0.15 ### 0.80 0.60 1.20 Reagents Sterile bandage $ 0.10 $ 0.10 ### Breakage/losses $ 0.05 $ 0.05 ### When the tests are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials required, and reagent costs will remain the same (reagents from all three tests are required) a. As a starting point, what is the price of the combined test assuming marginal cost pricing? In the blue shaded area calculate the Price using an Excel formula. PRICE b. Assume that Allied wants a contribution margin of $10 per test. What price must be set to achieve this goal? HINT: Price - VC = CM. In the blue shaded area calcu Price using an Excel formula. PRICE c. Allied estimates that 2,000 of the combined tests will be conducted during the year. The annual allocation of direct fixed and overhead costs totals $40,000. What p be set to cover full costs? What price must be set to produce a profit of $20,000 on the combined test? In the blue shaded area calculate the Price using an Excel form Profit PRICE (full cost) $ PRICE ($20,000 profit) $ - 20,000 3 ts that have the following variable costs: ge/losses will apply. Two blood vials are e Price using an Excel formula. = CM. In the blue shaded area calculate the verhead costs totals $40,000. What price must culate the Price using an Excel formula. 4 Chapter 7 Problem 7.4 Assume that Valley Forge Hospital has only the following three payer groups: Number of admissions Average Revenue Variable Cost per Admission per Admission Commercial 1,000 $ 5,000 $ 3,000 PennCare 4,000 $ 4,500 $ 4,000 Medicare 8,000 $ 7,000 $ 2,500 Hospital Fixed costs = $ 38,000,000 a. What is the hospital's net income? Fill in the blue shaded areas in the table below using Excel formulas. Valley Forge Profit & Loss Statement Total Revenue Total Variable Cost Contribution Margin Fixed Costs Net Income (Loss) b. Assume that half of the 100,000 covered lives in the commercial payer group will be moved into a capitated plan. All utilization and cost data remain the same. Wh will the hospital have to charge to retain its Part a net income? Fill in the blue shaded areas in the table below using Excel formulas. Number of admissions Commercial FFS 500 Capitated Average Revenue Variable Cost per Admission per Admission $ 3,000 - $ 3,000 PennCare 4,000 $ 4,500 $ 4,000 Medicare 8,000 $ 7,000 $ 2,500 Hospital Fixed costs = 500 $ 5,000 $ $ 38,000,000 Commercial Revenue pre-split Other than creating a new line and splitting the number of adm between the commercial and newly created capitated line, noth changed. Thus, the 100,000 lives in the capitated plan must pro the commerical revenue 50% reduction for capitation Capitated lives Annual Member Rate PMPM Verify your calculation with the P&L below. You should get the same net income as in part a. Valley Forge Profit & Loss Statement Total FFS Revenue Total Capit. Revenue Total Variable Cost Contribution Margin Fixed Costs 5 Net Income (Loss) c. What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent? Fill in the blue sh table below using Excel formulas. Number of admissions Commercial FFS 500 Capitated Average Revenue Variable Cost per Admission per Admission $ 5,000 $ 3,000 $ - $ 3,000 PennCare 4,000 $ 4,500 $ 4,000 Medicare 8,000 $ 7,000 $ 2,500 Hospital Fixed costs = $ 38,000,000 Valley Forge Profit & Loss Statement Total FFS Revenue Total Capit. Revenue Total Variable Cost Contribution Margin Fixed Costs Net Income (Loss) d. We are not doing 6 cost data remain the same. What PMPM rate and splitting the number of admissions equally wly created capitated line, nothing has s in the capitated plan must provide for half of 7 y 10 percent? Fill in the blue shaded areas in the 8