Cost Behavior
Posted on March 30, 2009 - Filed Under Finance | 1 Comment
Health services managers are vitally interested in how costs are affected by changes in the organization’s activity (volume). The relationship between cost and activity, called cost behavior or underlying cost structure, is used by managers in planning, control, and decision making. The primary reason for
defining an organization’s underlying cost structure is to provide managers with […]
Fixed Costs
Posted on March 29, 2009 - Filed Under Finance | Leave a Comment
Some costs, called fixed costs, are more or less known with certainty, regardless of the level of volume within the relevant range. For example, the clinic has a labor force of well-trained permanent employees that would be increased or decreased only under unusual circumstances. Thus, as long as volume falls
within the relevant range, labor costs […]
Projected P&L Statement Analysis
Posted on March 28, 2009 - Filed Under Finance | 1 Comment
Table 5.9 contains three projected P&L statements in this capitated environment. The three volume levels shown are the same as those contained in Table 5.6 for a fee-for-service environment. To begin, start with the middle column—the one that contains the expected 75,000 patient visits. The bottom line, $419,038, is the same as in the fee-for-service […]
Read More..>>A Graphical View in Terms of Membership
Posted on March 27, 2009 - Filed Under Finance | Leave a Comment
Figure 5.5 is like Alice, of Alice in Wonderland, peering through the looking glass and finding that everything is backwards. The key to this problem is that the horizontal axis does not measure the volume to which revenues are related—that is, the horizontal axis in Figure 5.5 has number of visits on the horizontal axis, […]
Read More..>>A Graphical View in Terms of Utilization
Posted on March 26, 2009 - Filed Under Finance | Leave a Comment
Figure 5.5 contains a graphical CVP analysis for the capitation contract that is constructed similar to the fee-for-service graphs shown in Figures 5.3 and 5.4 in that the horizontal axis shows the number of visits, while the vertical axis shows dollars of revenues and costs. Also shown is the same underlying cost structure of $4,967,462 […]
Read More..>>Profit Analysis in a Capitated Environment
Posted on March 25, 2009 - Filed Under Finance | Leave a Comment
As a review of profit analysis, consider how the analysis is changed when provider operates in a capitated environment. In addition to solidifying concepts presented in previous sections, this section provides insights into the basic differences between fee-for-service reimbursement and capitation.
Read More..>>Marginal Analysis: Short-Term Versus Long-Term Implications
Posted on March 24, 2009 - Filed Under Finance | Leave a Comment
The Atlanta/Peachtree illustration points out how the contribution margin can be used in managerial decision making. To help see this, the analysis needs to be viewed from a different perspective. Suppose the clinic is forecasting a volume of 50,000 visits for 2005, and Peachtree HMO offers to provide the clinic 25,000 additional visits at $60 […]
Read More..>>Evaluating the Alternative Strategies
Posted on March 23, 2009 - Filed Under Finance | Leave a Comment
What should Atlanta’s managers do? If Peachtree’s proposal is accepted, the clinic is expected to lose $580,962 rather than make a profit of $419,038 when no discount was demanded. The difference is a swing of $1 million in profit in the wrong direction, hardly an enticing prospect. What happened to the “missing” $1 million? It […]
Read More..>>The Impact of Accepting the Proposal
Posted on March 22, 2009 - Filed Under Finance | Leave a Comment
An alternative strategy for the clinic’s managers would be to accept Peachtree’s proposal. The resulting projected P&L statement is contained in Table 5.8. The average per visit revenue of serving these two different payer groups is (2/3 × $100) + (1/3 × $60) = $86.67. Total revenues based on this average
revenue per visit would be […]
The Impact of Rejecting the Proposal
Posted on March 21, 2009 - Filed Under Finance | Leave a Comment
If Atlanta’s managers reject the proposal, the clinic would lose market share— an estimated 25,000 visits. The projected P&L statement that would result, which is based on 50,000 undiscounted visits, is shown in Table 5.7. At the lower volume, the clinic’s total revenues, total variable costs, and total contribution margin decrease proportionately (i.e., by one […]
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