The Impact of Cost Structure on Financial Risk
Posted on July 14, 2009 - Filed Under Finance
The financial risk of a healthcare provider, at least in theory, is minimized by having a cost structure that “matches” its revenue structure. To illustrate, consider a clinic with all revenues (reimbursement) tied to volume. For this clinic, each visit adds to the business’s revenues. If the clinic’s cost structure consisted of all variable costs (no fixed costs), then each visit would incur costs, but at the same time create revenues. Assuming that per visit revenue exceeds per visit costs, the clinic would “lock in” a profit on each visit. The total profitability of the clinic would be uncertain, as it is tied to volume, but the ability of the clinic to generate a profit would be a sure thing.
On the other extreme, consider a hospital with all patient reimbursement being capitated. In this situation, assuming a fixed number of covered lives, the hospital’s revenue stream is fixed regardless of volume. Now, to match the revenue and cost structures, the hospital must have all fixed (no variable) costs. Now, assuming that annual fixed revenue exceeds annual fixed costs, the hospital has a “guaranteed” profit at the end of the year.
Taken From : HEALTHCARE FINANCE
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