QUESTION 3:

The payer is negotiating the managed care contract for the coming year and proposed two alternative reimbursement options:

Option A: Discounted fee-for-service with 5% on average reimbursement per admission

Option B: Capitation payment and pay $90 Per Member Per Month (PMPM) for the 15,000 members. In the meantime, the insurer will jointly work on a preventive care department project with the hospital and cover the initial investment. The new preventive care department is to deliver preventive care to members covered, which aims population health improvement. The admission is expected to reduce to 1,600 and the variable cost per admission is expected to reduce to $3,500. However, fixed cost to run the preventive care department will cost additional $500,000 to MMC.

Question 1: Whats the break-even volume of MMC?

Revenue	10,000.00
Variable Cost	4,000.00
Contribution Margin	6,000.00
Fixed Cost	9,000,000.00
Breakeven	1,500.00

Question #2: MMC offered service to 1,800 patients last year to members covered by this insurance company. At this service volume, how much is the degree of operating leverage?

	1800 units
Sales	18,000,000.00
Variable Cost	7,200,000.00
Fixed Cost	9,000,000.00
EBIT	18,000,000.00
%EBIT	66.67%
% Sales	11.11%
Degree of Operating Leverage	6.00

WORK FOR QUESTION 3: DISCUSS

Units	1800
Revenue per admission	9500
Sales	17100000
Variable Cost No. of Units x 4000	7200000
Contribution Margin	9900000
Fixed Cost	9000000
EBIT or Profit	90000
Degree of operating leverage=Contribution margin/operating income or EBIT	11

Discuss the profit and business risk compared to the current fee-for-service payment.