HCMG750 Financial Mgmt for Health Care

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HCMG750

Case Study: Breakeven Analysis/Pricing/Contribution Margin

Week 2

Points: 50

 

Use the information below to answer the questions that follow. Put your answers on a separate document and show your work.  (Review Chapter 8)

 

You are heading up a large multi-specialty group practice.  There are four specialties in the group:  Internal Medicine, General Surgery, Pediatrics, and OB-GYN.  You anticipate a total of 12,500 patients per month between the four specialties.  

 

The fixed costs for each specialty are listed in the table below:

Internal Medicine General Surgery Pediatrics OB-GYN
Rent 1,000 1,500 1,200 1,400
Malpractice Insurance 2,000 2,750 2,100 3,250
Depreciation 900 1,500 1,000 950
Salaries (clerical and professional) 56,100 69,250 42,700 90,400
Total 60,000 75,000 47,000 96,000

 

The variable costs and estimated number of patients are as follows:

 

Speciality
Estimated # of Patients
Variable Costs
Int. Med. 5000 $40
Gen. Surg. 1875 $65
Peds. 3125 $35
OB-GYN 2500 $60
Total 12,500

 

  1. Assume that you are looking at each specialty separately.  What will each specialty have to charge in order to breakeven.  (remember:  charge is equivalent to price).  (8)

 

  1. You have been approached by a managed care corporation who wants to reimburse you as follows: 

 

Specialty

Reimbursement Rate
Int. Med. $50
Gen. Surg. $105
Peds. $55
OB-GYN $95

 

  1. Looking at each program separately, how many patients would you need to see in each service in order to break even if you accept the managed care company’s offer?  (remember:  the reimbursement rate is equivalent to price) (8)

 

  1. Would you accept the managed care company’s offer overall?  Why or why not?  Would you accept the offer for any of the departments?  Keep in mind the behavior of fixed costs in your discussion.  What argument would you make to the managed care company to improve their offer?    (5)

 

  1. The malpractice insurance rate for OB-GYN is going up by 20% and their variable costs have risen to $65.  In addition, their anticipated number of patients will decrease to 2000 due to the retirement of one of their physicians.  You have been told that the customary rate for OB-GYN cannot exceed $100.  Will this price allow your OB-GYN department to break even?  Show your work. (8)

 

  1. What strategies (more than one) can you put in place in order to operate at a price of $100?  (8)

 

  1. Contribution Margin
    1.  Assume you want to calculate the contribution margin of General Surgery to the practice.  See their activity for 2019 below

 Actual Number of Visits:  1950

 

Charge per visit:                 $135

Variable Cost per visit:   $  65

 

Total Fixed Cost:            $75,000      

 Using the formula in your textbook on page 73, calculate the contribution margin and the operating income that General Surgery will contribute to the practice. (4)

Contribution Margin:  __________________

Operating Income:     __________________

 

    1.     Assume that Internal Medicine had the following activity:

 Actual Number of Visits: 4500

Charge per visit:                 $60

Variable Cost per visit:       $40

 

Total Fixed Cost:                $60,000

 

 Calculate the contribution margin and operating income that Internal Medical will contribute to the practice. (4) 

Contribution Margin:  __________________

Operating Income:     __________________

    1. If Internal Medicine sees two times more patients than General Surgery, why is their contribution margin so much less?  (5)

 

Description

Case Study: Breakeven Analysis/Pricing

HCMG750

Case Study: Breakeven Analysis/Pricing/Contribution Margin

Week 2

Points: 50

Use the information below to answer the questions that follow. Put your answers on a separate document and show your work.  (Review Chapter 8)

You are heading up a large multi-specialty group practice.  There are four specialties in the group:  Internal Medicine, General Surgery, Pediatrics, and OB-GYN.  You anticipate a total of 12,500 patients per month between the four specialties.  

 

The fixed costs for each specialty are listed in the table below:

Internal Medicine General Surgery Pediatrics OB-GYN
Rent 1,000 1,500 1,200 1,400
Malpractice Insurance 2,000 2,750 2,100 3,250
Depreciation 900 1,500 1,000 950
Salaries (clerical and professional) 56,100 69,250 42,700 90,400
Total 60,000 75,000 47,000 96,000

 

The variable costs and estimated number of patients are as follows:

 

Speciality
Estimated # of Patients
Variable Costs
Int. Med. 5000 $40
Gen. Surg. 1875 $65
Peds. 3125 $35
OB-GYN 2500 $60
Total 12,500

 

  1. Assume that you are looking at each specialty separately.  What will each specialty have to charge in order to breakeven.  (remember:  charge is equivalent to price).  (8)

 

  1. You have been approached by a managed care corporation who wants to reimburse you as follows: 

 

Specialty
Reimbursement Rate
Int. Med. $50
Gen. Surg. $105
Peds. $55
OB-GYN $95

 

  1. Looking at each program separately, how many patients would you need to see in each service in order to break even if you accept the managed care company’s offer?  (remember:  the reimbursement rate is equivalent to price) (8)

 

  1. Would you accept the managed care company’s offer overall?  Why or why not?  Would you accept the offer for any of the departments?  Keep in mind the behavior of fixed costs in your discussion.  What argument would you make to the managed care company to improve their offer?    (5)

 

  1. The malpractice insurance rate for OB-GYN is going up by 20% and their variable costs have risen to $65.  In addition, their anticipated number of patients will decrease to 2000 due to the retirement of one of their physicians.  You have been told that the customary rate for OB-GYN cannot exceed $100.  Will this price allow your OB-GYN department to break even?  Show your work. (8)

 

  1. What strategies (more than one) can you put in place in order to operate at a price of $100?  (8)

 

  1. Contribution Margin
    1.  Assume you want to calculate the contribution margin of General Surgery to the practice.  See their activity for 2019 below

 Actual Number of Visits:  1950

 

Charge per visit:                 $135

Variable Cost per visit:   $  65

 

Total Fixed Cost:            $75,000      

 Using the formula in your textbook on page 73, calculate the contribution margin and the operating income that General Surgery will contribute to the practice. (4)

Contribution Margin:  __________________

Operating Income:     __________________

 

    1.     Assume that Internal Medicine had the following activity:

 Actual Number of Visits: 4500

Charge per visit:                 $60

Variable Cost per visit:       $40

 

Total Fixed Cost:                $60,000

 

 Calculate the contribution margin and operating income that Internal Medical will contribute to the practice. (4) 

Contribution Margin:  __________________

Operating Income:     __________________

    1. If Internal Medicine sees two times more patients than General Surgery, why is their contribution margin so much less?  (5)

 

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