30 Jan Medical supplies 50,000

5.1 a. Using a hospital to illustrate your answer, explain the difference between a price setter and a price taker.

b. Can most providers be classified strictly as price setters or price takers?

5.2 Explain the essential differences between full-cost pricing and marginal cost pricing strategies.

5.3 What would happen financially to healthcare organization overtime if its prices were set at either full costs or marginal costs?

5.4 What is cross-subsidization (price shifting)?

5.5 a. What is target costing?

b. suppose a hospital was offered a capitation rate for a covered population of $40 per member per month. Briefly explain how target costing would be applied in this situation.

5.6 a. What is profit (CVP) analysis?

b. Why is it so useful to healthcare managers?

c. What is a profit and loss (P&L) statement?

5.7 a. Define contribution margin.

b. What is its economic meaning?

5.8 a. Write out and explain the equation for volume breakeven.

b. what is the difference between accounting breakeven and economic breakeven?

5.9 What are the critical differences in profit analysis when conducted in a capitated environment versus a fee-for-service environment?

5.10 How does a provider’s incentive differ when it moves from a fee-for-service to a capitated environment?

5.11 a. What cost structure is best when a provider is capitated? Explain.

b. What cost structure is best when a provider is reimbursed primarily by fee-for-service payers? Explain.

5.1 Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates:

Variable cost per visit $5.00

Annual direct fixed costs $500,000

Annual overhead allocation $50,000

Expected annual utilization 10,000 visits

a. What per visit price must be set for the service to break even? To earn an annual profit of $100,000?

b. Repeat Part a, but assume that the variable cost per visit is $10.

c. Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are $1,000,000.

d. Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs.

5.3 Allied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs:

Test A Test B Test C

Disposable syringe $3.00 $3.00 $3.00

Blood vial 0.50 0.50 0.50

Forms 0.15 0.15 0.15

Reagents 0.80 0.60 1.20

Sterile bandage 0.10 0.10 0.10

Breakage/losses 0.05 0.05 0.05

When the tests are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials are required, and reagent costs will remain the same (reagents are required for all three tests).

a. As a starting point, what is the price of the combined test assuming marginal cost pricing?

b. Assume that Allied wants a contribution margin of $10per test. What price must be set to achieve this goal?

c. Allied estimates that 2,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and overhead costs totals $40,000. What price must be set to cover full costs? What price must be set to produce a profit of $20,000 on the combined test?

To getting $20,000 profit:

5.8 You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows:

Revenues (10,000 visits) $400,000

Wages and benefits 220,000

Rent 5,000

Depreciation 30,000

Utilities 2,500

Medical supplies 50,000

Administrative supplies 10,000

Assume that all costs are fixed except supply costs, which are variable. Furthermore, assume that the clinic must pay taxes at a 30 percent rate.

a. Construct the clinic’s projected P&L statement.

b. What number of visits is required to break even?

c. What number of visits is required to provide you with an after-tax profit of $100,000?