A Graphical View in Terms of Utilization
Posted on June 14, 2009 - Filed Under Finance
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 in fixed costs coupled with a variable cost rate of $28.18. One very significant difference exists, however. Instead of being upward sloping, the total revenues line is horizontal, which shows that total revenue is $7,500,000 regardless of volume as measured by the number of visits.
Several subtle messages are inherent in this flat revenue line. First, it tells managers that revenue is being driven by something other than the volume of services provided. Under capitation, revenue is being driven by the insurance contract (i.e., by the premium payment and the number of covered lives, or enrollees ). This change in the revenue source is the core of the logic switch from fee-for-service to capitation; the clinic is being rewarded to manage the healthcare of the population served rather than to provide services. However, the clinic’s costs are still driven by the amount of services provided (the number of visits).
Taken From : HEALTHCARE FINANCE
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