Problem #1

General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services:

Fixed costs - $10,000,000
Variable cost per inpatient day - 200
Charge (revenue) per inpatient day - 1,000

The hospital expects to have a patient load of 15,000 inpatient days next year.

a. Construct the hospitals base case projected P&L statement.
b. What is the hospitals breakeven point (in number of inpatient days)?
c. What volume is required to provide a profit of $1,000,000? A profit of $500,000?

d. Now, assume that 20 percent of the hospitals inpatient days come from a managed care plan that requests a 25 percent discount from charges. Should the hospital agree to the discount proposal? Assume that the managed care plan will contract with a different provider if the hospital does not agree to the discount (i.e., the hospital will lose the inpatient days associated with the contract).