Marginal Analysis: Short-Term Versus Long-Term Implications (2)
Posted on June 11, 2009 - Filed Under Finance
However, Atlanta’s managers cannot ignore the long-termimplications associated with accepting the proposal. These are not addressed in detail here, but clearly the clinic cannot survive this scenario in the long run because the clinic’s revenues are not covering the full costs of providing services. In the
meantime, bleeding $580,962 of losses in 2005 may be better than bleeding $1,376,462 until the clinic can adjust to market forces in its service area. This adjustment may be as simple as merely absorbing the losses while the clinic’s competitors, perhaps in poorer financial condition, exit the market as they too face the same difficult economic choices. Should this happen, a new equilibrium would be established in the market that would allow the clinic to raise its prices. If the long-term solution is not that simple, Atlanta Clinic must reduce its cost structure or perish.
Another problem associated with accepting the discount offer is that the clinic’s other payers will undoubtedly learn about the reduced payments and want to renegotiate their contracts with the same, or even greater, discount. Such a reaction would clearly place the clinic under even more financial
pressure, and a draconian change in either volume or operating costs would be required for survival.
Taken From : HEALTHCARE FINANCE
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