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Healthcare Finance

Assume that a radiologist group practice has the following cost structure:

Fixed Costs  \$500,000

Variable cost per procedure \$25

Charge (revenue) per procedure \$100

Furthermore, assume that the group expects to perform 7,500 procedures in the coming year.

a. Construct the group’s base case projected P&L statement,

b. What is the group’s contribution margin? What is its breakeven point?

c. What volume is required to provide a pretax profit of \$100,000? A pretax profit of \$200,000?

d. Sketch out a CVP analysis graph depicting the base case situation.

e. Now assume that the practice contracts with one HMO, and the plan proposes a 20 percent discount from charges. Redo questions a, b, c, and d under these circumstances.

Problem 5.7 Breakeven & Profit Behavior (Capitation)

Grandview Clinic has fixed costs of \$2million and an average variable cost rate of \$15 per visit. Its sole payer, an HMO, has proposed an annual capitation payment of \$150 for each of its 20,000 members. Past experience indicates the population served will average two visits per year.

a. Construct the base case projected P&L statement on the contract.

b. Sketch two CVP analysis graphs for the clinic – one with number of visits on the X axis. Compare and contrast these graphs with the value in Problem 5.3.d?

c. What is the clinic’s contribution margin on the contract? How does this value compare with the value in Problem 5.3.b?

d. What profit gain can be realized if the clinic can lower per-member utilization to 1.8 visits?

Problem 5.3

a)      The project P&L statement is shown below.

 Particulars Amount Number of procedures 7,500 Expected revenue 750,000 (-)Cost of sales 187,500 Gross profit 562,500 (-)Fixed costs 500,000 Profit before tax (\$) 62,500

b)      Revenue per procedure = \$ 100

Variable cost per procedure = \$ 25

Hence contribution margin per procedure = 100-25 = \$ 75

Total contribution margin for the group = 7500*75 = \$562,500

Fixed cost = \$500,000

Let the break even volume of procedures be X

Thus Fixed costs = Contribution margin *X

Hence 500000 = 75*X

Solving the above, we get X =6,667

c)       Pretax profit desired = \$ 100,000

Profit = Revenue – Fixed cost – Variable cost

Let the volume of procedures required for this profit level be X

Then 100000 = 75*X – 500000

Solving the above we, get X= 8000 units

Now Pretax profit desired = \$ 200,000

Profit = Revenue – Fixed cost – Variable cost

Let the volume of procedures required for this profit level be Y

Then 200000 = 75*Y – 500000

Solving the above we, get Y= 9,334 units