Cardiac Rehabilitation Services and Winter Wellness Programs: Pricing and Budgeting Strategies

Overview of Big Heart's Pricing Strategy for Cardiac Rehabilitation Services

Problem 1

Big Heart Provides Cardiac Rehabilitation Services to their patients.  They have 2 types of patients fee for service and capitated patients from Tri-State HMO.  

Big Heart provides supervised exercise sessions for 750 fee for service patients who pay $600 per year for unlimited exercise session access.  In addition, they annually provide 600 nutrition counseling sessions for the fee for service patients.  Fee for service patients pay $65 for each nutrition session. 

2% of the Tri-State HMO patients have a history of cardiac issues or diabetes (that also benefits from exercise) and will participate in the exercise session program.  Historically Tri-State HMO patients utilize 10 nutrition counseling sessions per 1000 members. 

Big Heart’s fixed costs that include rent, utilities, equipment lease, maintenance and administrative staff is $500,000 per year.  The other fixed cost is the 2 Certified Nurse Practitioner/Exercise Physiologists who oversee all exercise activities each earn $110,000 per year, including fringe benefits.  There are no variable costs for the exercise program. Big Heart’s only variable cost are dieticians who are paid $50 per nutrition counseling session. 

Tri-State HMO is negotiating a new contract for their 100,000 enrollees in the Big Heart service area. 

A)What is the minimum capitated payment in per member per month terms Big Heart will accept from Tri-State HMO if they just want the organization to break even?

B)What PMPM should they charge if they want to earn $50,000 profit in total in the next year to expand their clinic? 

Problem 2

The Hibernation Cave (HibCa) provides nutrition and exercise programs for people suffering from the winter blahs and an overwhelming desire to curl up under a blanket and drink hot cocoa.  (35 points) 

HibCa’s annual rent for the building (that includes utilities) and leases for exercise equipment total $180,000 per year. 

Each nutrition counseling session uses 45 minutes of dietician time and $5 in materials. Each exercise session uses 1 hour personal trainer time.  

HibCa hires Dieticians and Personal Trainers on a freelance contract basis and does not provide them any benefits.  Dieticians earn $40 per hour and Personal Trainers are paid $25 per hour. Payment for these personnel is based on the time directly spent in a session. The Director of HibCa is paid a salary of $2000 per week 

HibCa’s manager projects they would sell 1200 nutrition counseling sessions at $100 each and 52,000 exercise sessions at $20 each in 2020.

Complete The Winter Ball Foundation’s Annual Static Budget for 2020 below

Revenue

Total Cost

Profit

Revenue Breakdown

Nutrition Services

Physical Activity Services

Cost Breakdown

Fixed cost

Dietician services

Trainer Services

Supplies

Flash forward: as 2020 comes to a close, the manager is going through their books.  They find that they actually provided 1100 nutrition counseling services.  100 of those services were provided during the mid-summer half off promotion offering the sessions for $50 each.  (Winter Blahs are less likely in the summer, but their programs work for The Dog Days of Summer Doldrum’s and the desire to lay on a beach chair as well.)  The remainder were sold at full price.  

HibCa actually provided 55,000 exercise sessions.  5,000 of these were sold during the summer promotion at $10 each.  The remainder were sold at $20.  

Personal Trainer and Dietician contracted hourly rates remained the same throughout the year. 

B)What is the HibCa’s flexible budget amount for: revenue, fixed cost, supplies, dieticians, personal trainers, and profit?  

What is HibCa’s actual revenue, total cost and profit? (3 points) 

D) For each of the 2 service lines, Nutrition and Exercise, (Calculate these variances separately for each service line) What is HibCa’s:

Total Revenue Variance

Revenue Volume Variance

Revenue Price Variance

E)For each of the 2 service lines Nutrition and Exercise Calculate these variances separately for each service line What is HibCa’s:

Total Cost Variance

Cost Volume Variance

Cost Management Variance

F)What is your assessment of these results?  What are your conclusions of HibCa’s financial performance and what recommendations do you have for 2021? 

G)HibCa is considering eliminating Nutrition Counseling and focusing on exercise in 2021.  What impact would that have on HibCa’s profitability? Should they eliminate nutrition programs What assumptions are you making? Support your answer.