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A not-for-profit acute care hospital has estimated the following for its inpatient services:

Fixed costs = $10,000,000 Variable cost per inpatient day = $200

The hospital expects to have 15,000 inpatient days next year.

a. What is the underlying cost structure?

b. What are the expected total costs?

c. What are the estimated total costs are 12,500 inpatient days? At 17,500 inpatient days?

d. What is the average cost per patient at 12,500, 15,000, and 17,500 patient days?

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Beverley Smith
Beverley SmithLv2
28 Sep 2019

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PART I: Calculation of the Capitation rate per member per month (PMPM) – Chapter 7 Goldberg and Silverstein (GS) is a for-profit mid-level HMO company, providing health plans mostly in metro areas. GS is exploring to extend its health plan in a fast growing community called Newtown. There are three acute care hospitals in Newtown. GS bought Griffith HMO to provide services in Newtown. Griffith HMO is providing health care plans in Newtown area for past ten years using Miller Hospital, one of the three hospitals in Newtown. You have been assigned to prepare capitation rates to offer a new contract to the Miller Hospital. You have researched the documentation from Griffith HMO, and collected the following information: Griffith HMO has currently 19,000 enrollees. The number of enrollees is expected for next year is 20,000. Here is expected utilization from the previous year data (suppose that hospital only provide the following services):  Inpatient days o 300 inpatient days per 1000 enrollees per year. o The cost of inpatient days: $1100 per day.  Outpatient Surgery o 450 surgeries per 10,000 enrollees per year. o The cost of per outpatient surgery is $900. Emergency Room Visit
o 50 per 1000, enrollees per month.
o The average cost of each ER visit is $300.
2
 Outpatient diagnostic (for CT Scan, MRI, Echocardiography, and Ultrasound)
o 100 visits per 1000 enrollees per year.
o The average cost is $500 per visit.
 Outpatient diagnostic (Other than CT Scan, MRI, Echocardiography, and
Ultrasound)
o 300 visits per 1000 enrollees per year.
o The average cost is $150 per visit.
The plan has 10% copay for inpatient services per day, $350 copay for each outpatient surgery,
$300 copay for ER visit and $50 copay for each diagnostic service per visit.
You are expected to 15% of copay as bad debt for Miller Hospital.
Griffith hospital uses physician services on a contractual basis and does not employ any
medical doctor. Therefore, GS will have separate capitation contract for physician services.
The coordination of benefit is expected to cover 1.2% of the total cost.
You are expecting 11% administrative cost. The CFO of GS suggested you include some profit
margin for the shareholders.
******************************************************************************
Calculate the capitation rate per member per month that will be offered to Miller Hospital
with 2% and 3.5% profit margin for shareholders.
Please provide total capitation rates per member per month and also for PMPM for each
service mentioned above to Miller Hospital) using an Excel worksheet

INPUT DATA: KEY OUTPUT:
Land initial cost $150,000 NPV $1,408,166
Land opportunity cost (and salvage value) $200,000 IRR 14.7%
Building/equipment cost $10,000,000 MIRR 12.9%
Build/equipment salvage value $5,000,000 Payback 4.0
Procedures per day 20
Average net revenue per procedure $1,000
Labor costs $696,000
Utilities costs $50,000
Incremental overhead $36,000
Supply cost ($/procedure) $200
Inflation rate on charges 3.0%
Inflation rate on costs 3.0%
Tax rate 40.0%
Revenues lost from inpatient surgeries $1,000,000
Reduction in inpatient surgery costs $500,000
Cost of capital 10.0%
MODEL-GENERATED DATA:
Depreciation Schedule:
MACRS Deprec. End of Year
Year Factor Expense Book value
1 0.20 $2,000,000 $8,000,000
2 0.32 3,200,000 4,800,000
3 0.19 1,900,000 2,900,000
4 0.12 1,200,000 1,700,000
5 0.11 1,100,000 600,000
6 0.06 600,000 0
Net Cash Flows:
Project Cash Flows
0 1 2 3 4 5
Land opportunity cost ($200,000)
Building/equipment cost (10,000,000)
Net revenues (including inpatient loss) $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Less: Labor costs 696,000 716,880 738,386 760,538 783,354
Cost savings on inpatients (500,000) (515,000) (530,450) (546,364) (562,754)
Utilities costs 50,000 51,500 53,045 54,636 56,275
Supplies 1,000,000 1,030,000 1,060,900 1,092,727 1,125,509
Incremental overhead 36,000 37,080 38,192 39,338 40,518
Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Income before taxes $718,000 ($400,460) $983,526 $1,770,032 $1,959,133
Taxes 287,200 (160,184) 393,410 708,013 783,653
Project net income $430,800 ($240,276) $590,116 $1,062,019 $1,175,480
Plus: Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Plus: Net land salvage value 180,000
Plus: Net building/equipment salvage value 3,240,000
Net cash flow ($10,200,000) $2,430,800 $2,959,724 $2,490,116 $2,262,019 $5,695,480
Cumulative net cash flow ($10,200,000) ($7,769,200) ($4,809,476) ($2,319,360) ($57,341) $5,638,139
(For payback calculation)
Profitability and Breakeven Measures:
Net present value (NPV) $1,408,166
Internal rate of return (IRR) 14.7%
Modified IRR (MIRR) 12.9%
Payback

4.0
(Question)

What is “incremental cash flow”? Because the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Think about why or why not . . .

The hospital already owns the site for the center, so should any cost be attributed to the land? Why or why not . . .

What overhead costs should be included in the analysis?

How should the cannibalization of inpatient surgeries be handled?

What is the project’s payback? What is the economic interpretation of payback? What type of information do decision-makers get from the payback?

What is the project’s net present value (NPV)? Think about the economic rationale behind this profitability measure.

What is the project’s internal rate of return (IRR)? Think about the economic rationale behind IRR. Do the NPV and IRR always lead to the same conclusion about a project’s profitability?

What is the project’s modified internal rate of return (MIRR)? How does MIRR differ from IRR? Which one is a better measure of a project’s true rate of return?

To give the board a better feel for the impact of inflation on the outpatient surgery center, you may wish to construct an inflation impact table.

You may wish to conduct a sensitivity analysis—creating a table and/or graph that shows the sensitivity of NPV to procedures per day, average charge, and salvage value. Assume that each variable can deviate from its base case value by +/-10, +/-20, and +/-30 percent. Think about the advantages and disadvantages of sensitivity analysis.

xx

47. True or False: The balance sheet and income statement together provide detailed information about where a business gets its cash and how that cash is spent.

48.Carlisle Clinic, a not-for-profit organization, began 2016 with an equity balance of $1,000,000. Assuming Carlisle Clinic reported net income of $200,000 for the year ended December 31, 2015, and had no other adjustments to equity during 2015, what was Carlisle Clinic’s equity balance as of December 31, 2014?

a. $800,000

b. $1,200,000

c. $200,000

d.$1,000,000

e. Can’t tell with the information provided

56.Smith Pharmaceuticals is trying to estimate the breakeven volume of sales on a newly developed drug. Which of the following would be expected to reduce the number of pills Smith would need to sell to breakeven (i.e., which would result in a lower breakeven volume) assuming everything else remains the same?

a. An increase in total fixed costs

b. A decrease in the selling price per pill

c. An increase in the variable cost per pill

d. An increase in the unit (per pill) contribution margin

e. An increase in allocated overhead (indirect) costs

57.Assume the local children’s hospital implements an outpatient asthma intervention to improve the health outcomes of children with asthma. As a result, the hospital sees a dramatic reduction in the number of inpatient admissions for children with asthma, but very little change in the total cost of operating the hospital. Which of the following statements describes the most likely reason for the lack of cost savings?

a. The hospital’s cost structure primarily consists of variable costs.

b. The hospital’s cost structure primarily consists of fixed costs.

c. The hospital’s cost structure consists of an equal mix of variable and fixed costs.

d. The hospital reduced its capacity (i.e., downsized) following the drop in admissions.

e. The hospital has a very high variable cost per admission

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