A Graphical View in Terms of Membership (2)
Posted on June 29, 2009 - Filed Under Finance
The analysis based on number of members reveals that there are two elements to controlling total variable costs under capitation: the underlying variable cost of the service ($28.18 per visit) and the number of visits per member (four). The two-variable nature of the variable cost rate makes cost control more difficult under capitation. In a fee-for-service environment, cost control entails only minimizing per visit expenses. Utilization is not an issue. If anything, utilization is good because per visit revenue almost always exceeds the variable cost rate. (In other words, there is a positive contribution margin.) Capitation requires a change in management thinking about cost control because utilization is now a component of the variable cost rate and hence total variable costs. Of course, control of fixed costs is always financially prudent,regardless of the type of reimbursement.
Conversely, there is one positive feature of the variable cost structure under capitation. With two elements to control, the clinic has more opportunity to lower the variable cost rate under capitation than under fee-for-service reimbursement. The key is the ability of Atlanta’s managers to control utilization.
If both utilization and per visit costs can be reduced, the clinic can reap greater benefits (profits) than possible under fee-for-service reimbursement.
Taken From : HEALTHCARE FINANCE
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