A Graphical View in Terms of Membership
Posted on June 26, 2009 - Filed Under Finance
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, just as if Atlanta Clinic were selling healthcare services. It is not; it is now selling insurance, so the appropriate horizontal axis value is the number of members (enrollees).
Figure 5.6 recognizes that membership, rather than the amount of services provided, drives revenues. With the number of members on the horizontal axis, the total revenues line is no longer flat; revenues only look flat when they are considered relative to the number of visits. The revenue earned by the clinic is actually $7,500,000 / 18,750=$400 per member, which could be broken down to a monthly premium of $400 / 12 = $33.33. Thus, the expected $7,500,000 revenue shown on Figure 5.5 results from an expected
enrollee population of 18,750 members. The cost structure can easily be expressed on a membership basis as well. Fixed costs are no problem within the relevant range; they are inherently volume insensitive, whether volume is measured by number of visits or members. Thus, Figure 5.6 shows fixed costs as the same flat, dashed line as before. However, the variable cost rate based on number of enrollees is not the same as the variable cost rate based on number of visits. Per member variable cost must be estimated from two other factors: the variable cost rate of $28.18 per visit and the expected utilization of four visits per year. The combination of the two is 4 × $28.18 = $112.72, which is the clinic’s expected variable cost per member. Expressed as a per member basis, the contribution margin is now $400 ? $112.72 = $287.28,
as opposed to the ?$28.18 when volume is based on number of visits.
Taken From : HEALTHCARE FINANCE
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