The Importance of Utilization
Posted on July 2, 2009 - Filed Under Finance
Table 5.9 provides information on the impact of utilization changes on profitability. The center column, the base case, is once again our starting point. With an assumed utilization of four visits for each of Peachtree’s 18,750 members, 75,000 visits result in a projected profit of $419,038. However, if Atlanta’s managers are not able to limit utilization to the level forecasted (or less), the clinic’s profit would fall. Assume that realized utilization is actually 4.4 visits per member, rather than the 4.0 forecasted.
This higher utilization would result in 4.4 × 18,750 = 82,500 visits, which produces the profit of $207,688 shown in the right column in Table 5.9. Because revenues are fixed and total costs are tied to volume, higher utilization leads to higher costs and lower profit. With the same 82,500 visits, but total variable costs of $2,324,850 at the higher utilization rate, the variable cost per member increases to $2,324,850 / 18,750 = $124.99, which could also be found by multiplying 4.4 visits per member by the variable cost rate of $28.18.
The left column of Table 5.9 shows that the clinic’s profitability would increase to $583,468 if utilization was reduced to 3.69 visits per member, producing about 69,165 total visits. With lower utilization, total variable costs are reduced and profit increases. The key point is that the ability of a provider to control utilization is the primary key to profitability in a capitated environment. Less utilization means lower total costs, and lower total costs mean greater profit.
Taken From : HEALTHCARE FINANCE
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