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Jun 29th, 2014
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Using the example of “From the Front Lines” in Chapter 6 of your text, calculate the break even for the number of procedures.  Use an electronic spreadsheet to show how you computed the break even and embed the spreadsheet in your paper.  Discuss the impact of the various reimbursements (e.g., Medicare, Medicaid, private, or self-pay).  Think about your upcoming capital proposal and how you might use the break-even analysis in your Capital Investment Plan Proposal.  

Your paper should be one to two double-spaced pages in length.

Here's the answers to the exercises at the end of the book which will help you check in your knowledge for the different break even calculations.  

Answers to Chapter 6 End of Chapter Exercises

Exercise 1
Per OperationTotal
Average payment$2,000
Annual cost of rent, heat, and electricity, Fixed$360,000
Annual salaries, Fixed$540,000
Average medical supplies and drugs, Variable$850
Break-even operations = TFC / (ANR - AVC)783
Exercise 2
Per VisitTotal
Laundry - Variable$2.08$25,000
Laboratory - Variable$18.75$225,000
Pharmacy - Variable$30.00$360,000
Rent - Fixed$180,000
Janitorial - Fixed$30,000
Billings and collections - Variable$11.67$140,000
Staff Expenses - Fixed (but could be Variable)$360,000
AVC  and  TFC$62.50$570,000
Annual number of visits12,000
Average net revenue per visit$150
Break-even operations = TFC / (ANR - AVC)  6,514
Profit = added Fixed Costs$450,000
Break-even operations = TFC / (ANR - AVC)  11,657
Exercise 3
Average net revenue per day$172.00
Average variable cost per day$132.00
Total fixed costs$1,200,000
Break-even days = TFC / (ANR - AVC)  30,000
Full capacity  48,180
Occupancy at break-even62.3%
New days  32,000
Break-even ANR = AVC + TFC / Days$169.50
Exercise 4
Average net revenue per year$300.00
Average variable cost per year$150.00
Total fixed costs$900,000
Break-even enrollees = TFC / (ANR - AVC)  6,000
New enrollment  5,800
Break-even AVC = ANR - TFC / enrollees$144.83

Tip:  For this assignment, you will be calculating the volume needed.  The "From the Front Lines" scenario gives you more information than you need for the calculation, so don't let that throw you off.

In your paper, make sure that you:

  • Embed your spreadsheet into your paper as described in the instructions,
  • Explain your results thoroughly, and 
  • Discuss the impact of the different payment methods. 

I look forward to reading your 1-2 page, double-spaced paper.

Answers to Chapter 4 - Analyze This

For Middaugh United Hospital, the total of 24,769 inpatient days in 2012 included 22,787 patient days in general medical/surgical care units and 1,982 patient days in the intensive care unit. A patient day is a count of a patient being in the hospital for a full day, often counted as being in the hospital at midnight. There were also 25,573 patient visits to outpatient departments and 7,733 visits to the emergency department. In total, there were 58,075 patient days or patient visits in 2012. Total operating expenses in 2012 were $201,885,310.  Is $3,476.29 ($201,885,310 divided by 58,075) a good figure for Kimberly Su to use as a cost of a patient visit? Explain your reasoning.

Suggestion: This is mathematically correct as the average cost of a patient visit, though not very useful. An emergency department visit is very different from a day in the hospital or a day in the intensive care unit. More detail on costs is required to provide meaningful information on the cost of a patient visit.

What percentage of costs for Middaugh United Hospital are overhead costs? Are overhead costs too high? Explain your reasoning.

Suggestion: The overhead percentage for various general services are listed below. Total overhead costs are between 15.4%, just Administration, and 45.0%, for all general services.

Employee Benefits 8.5%
Administration 15.4%
Miscellaneous General Service 21.1%
Total General Service 45.0%

Employee benefits should be able to be linked to departments, so that 8.5% is probably not overhead. Many of the Miscellaneous items might be applied to departments, leaving something between 15 and 30% as overhead.

If you were the manager of Outpatient Services at Middaugh United Hospital, which method of cost allocation would you prefer to see the hospital use? Explain your reasoning.

Suggestion: Under the step-down method, the loss associated with outpatient services is less than the loss under the direct method. A manager concerned with the view of profitability of their department might prefer the step-down method.

Answers to Chapter 5 - Analyze This

Should the Hendrickson Memorial Health system be concerned that over half of their net patient services revenue comes from governmental sources? Explain your reasoning.

Suggestion: Perhaps any health system could be concerned about a concentration of payer market share, leaving the system vulnerable to unilateral payment changes. This requires close attention to payment methods to assure proper payment. Some students may have opinions about the government as a payer.

A clinic has negotiated with 80% of the insurance companies covering its patients for an average payment amount of $100. The clinic currently sees 200 patients per week and has an average expense per patient of $110. Insurance companies for the other 20% of patients have an average discount of 50%. What amount will the clinic need to charge other insurance companies to cover their costs?

Suggestion: Total Amount Per Patient
Total Patient Expenses $22,000 $110
Less net patient revenues, negotiated $16,000 $100
Required patient revenues, other payers $6,000 $150
Required charges at 50% collection $12,000 $300

A physician practice is considering moving from Alabama to Massachusetts where the GPCIs are higher than the national average (GPCI work time = 1.051, GPCI practice costs = 1.222, and GPCI malpractice = 1.023). For the same service, RVU 11100, what would be the new payment amount?

Suggestion:Work TimePractice ExpenseMalpractice ExpenseTotal
RVU 110001.0000.8780.474
Conversion factor $34.0376
Payment  $88.80

For APC 0108, confirm that the total payment is $30,716.76.

Exhibit 5.6. APC payments, 2012
APC WeightWage IndexConversion FactorTotal
Insertion/replacement/repair of cardioverter-defibrillator leads424.771.0546$70.02$30,716.76

For Hendrickson Memorial Hospital, confirm that revenues exceed costs by a total of $382,927 for the most frequent outpatient visits.

Suggestion: Total Payment: $4,889,698, Total Cost: $4,506,771, Difference: $382,927.

For Hendrickson Memorial Hospital, can you confirm that for the most frequent inpatient hospitalizations, costs exceeded revenues by a total of $1,193,814?

Suggestion: Total Payment: $13,822,633, Total Cost: $15,016,447, Difference: ($1,193,814).

Answers to Chapter 6 - Analyze This

If Chamberlin Skilled Nursing and Rehabilitation Center, Inc. were to provide 19,500 resident days of care in 2013, would their total of administration, facilities, and financing costs decrease to $2,106,000? Why or why not?

Suggestion: These costs are fixed costs and would not be different at different levels of days of care.

What would you calculate as Chamberlin Skilled Nursing’s total cost at 18,000 resident days per year?

Suggestion: Total costs = fixed costs of $2,108,640 + variable costs of ($431.91 × 18,000 days) = $9,883,009
Following a simple budget process, what would you calculate as Chamberlin Skilled Nursing’s net operating income at 19,000 resident days in 2013?

Revenues $10,378,560
Fixed Costs $2,108,640
Variable Costs $8,206,480
Total Costs $10,315,120
Net operating income (loss) $63,440

In the example of the EUS, what is the break-even number of procedures per year?

Suggestion: Ignoring the initial cost of the equipment, Q = ($336,000) ÷ ($885 - $175) = 474 procedures. If the equipment cost is spread over 5 years ($20,000 ÷ 5 = $4,000 per year), the break-even is 478 procedures.

Chamberlin Skilled Nursing expects fixed costs to be $2.2 million for the year, average net revenues to be $560 per day, and 18,600 resident days in 2013. What amount can Chamberlin afford to spend on average variable costs per day and break even, with zero profit, in 2013?

Suggestion: AVC = ANR – (TFC ÷ V); $441.72 = $560 – ($2,200,000 ÷ 18,600)

Chamberlin Skilled Nursing expects fixed costs to be $2.2 million for the year, average net revenues to be $560 per day, and the volume to be18,600 resident days in 2013. If Chamberlin wishes to earn $20,000 in profit, what amount can Chamberlin afford to spend on average variable costs per day in 2013?

Suggestion: AVC = ANR – (TFC ÷ V); $440.65 = $560 – (($2,200,000 + 20,000) ÷ 18,600).  Note that this AVC is $1.08 less than without the profit margin.

If you were the manager of Chamberlin Skilled Nursing, would you prefer to be paid $546.25 per day of resident care or $1,700 per enrollee for a population? Please explain your reasoning.

Suggestion: At $1,700 per enrollee, for 18,442 resident days, the per enrollee amount provides $377,908 more in profit and is therefore preferred. Further, if Chamberlin could reduce the number of resident days, it would make even more profit.
Per Day Per Enrollee
Total Resident Days / Population 18,482 6,161
Average net revenues $546.25 $1,700
Total net revenues $10,095,793 $10,473,700
Total variable costs $7,982,549 $7,982,549
Average variable costs $431.91 $1,295.66
Fixed Costs $2,108,640 $2,108,640
Profit $4,604 $382,511
Difference $377,908


ReferencesBaker, J. J. & Baker, R. W. (2011). Health Care Finance, Basic Tools for Nonfinancial Managers (3rd ed.). Sudbury, MA: 

  Jones & Bartlett Publishers. 

Robinson, J. C. (2011). Hospital Market Concentration, Pricing, and Profitability in Orthopedic Surgery and Interventional 

  Cardiology. American Journal Of Managed Care17(6), e241-e248.

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