A Graphical View in Terms of Utilization (2)
Posted on June 17, 2009 - Filed Under Finance
A second critical point about Figure 5.5 is the difference between the flat revenue and the flat fixed-cost base. Atlanta has a spread of $7,500,000 ? $4,967,462 = $2,532,538 to work with in the management of the healthcare of this population for the period of the contract. If total variable costs equal $2,532,538, the clinic breaks even; if total variable costs exceed $2,532,538, the clinic loses. Thus, to make a profit, the number of visits must be less than $2,532,538 / $28.18 = 89,870. If everyone in the organization, especially the managers and clinicians, does not understand the inherent utilization risk under capitation, the clinic could find itself in serious financial trouble. On the other hand, if Atlanta’s managers and clinicians at all levels understandand manage this utilization risk, a handsome reward may be gained.
A key feature of capitation is the reversal of the profit and loss portions of the graph. To see this, compare Figure 5.5 with Figure 5.3. The idea that profits occur at lower volumes under capitation is contrary to the fee-forservice environment. It is obvious, however, when one recognizes that the contribution margin, on a per visit basis, is $0 ? $28.18 = ?$28.18. Thus, each additional visit increases costs by $28.18 without bringing in additional revenue. The optimal short-termresponse to capitation from a purely financial
perspective is to take the money and run (provide no services) because zero visits allow the clinic to capture the full spread between total revenues and fixed costs. Of course, the clinic would have trouble renewing the contract in subsequent years, but it will have maximized short-term profit. Obviously,
this course of action is neither appropriate nor feasible. Still, its implications are at the heart of concerns expressed by critics of managed care about the incentives to withhold patient care inherent in a capitated environment.
Taken From : HEALTHCARE FINANCE
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