Finance Chapter 5

why is utilization management so important in a capitated environment?

The ability of a provider to control utilization is the primary key to profitability in a capitated environment. Less utilization means lower total costs, and lower total costs mean greater profit.

marginal cost

cost of one additional unit of volume

what cost structure would minimize risk if a provider were entirely capitated?

fixed cost

what cost structure would minimize risk if a provider had all fee-for-service reimbursement?

variable cost

profit analysis

A technique applied to an organization's cost and revenue structure that analyzes the effect of volume changes on costs and profits ** analysis of cost and revenue of the firm which determines whether or not the firm is profiting.

breakeven analysis

A type of analysis that estimates the amount of some variable (such as volume or price or variable cost rate) needed to break even.

why is breakeven analysis often conducted in an iterative manner?

After the breakeven volume is calculated, managers must determine whether the resulting volume can realistically be achieved at the price assumed in the analysis. If the price appears to be unreasonable for the breakeven volume, a new price has to be estimated and the breakeven analysis repeated.

why is the number of members so important in a captivated environment ?

Assuming constant per member utilization, more members increases profitability because additional members create additional revenues that presumably exceed their incremental (variable) costs.

What is meant by the statement, "Marginal analysis is made more complicated by long-run considerations"?

Because over long term, you have fixed costs which don't change. So if you make less, then you still have to pay a large fixed cost.

what are the real world constraints on creating matching cost structures?

Few providers are reimbursed solely on a fee-for-service or a capitated basis. Providers do not have complete control over their cost structures.

how does time period affect the estimation of fixed and variable costs?

Fixed costs cannot exist over a long period of time—at some point of increasing volume, healthcare businesses must incur additional fixed costs. Variable costs over a short enough period of time can be fixed.

what is unique about the contribution margin under capitation?

The contribution margin decreases

whats the impact of a discount contract on fixed costs, total variable costs and the breakeven point?

Fixed costs rise, total variable costs rise, and the breakeven point rises so you need to see more patients to break even.

What is the difference between accounting and economic breakeven?

For an accounting breakeven, managers may seek the number of visits needed to breakeven. For an economic breakeven, managers will build a profit target into the breakeven analysis (how many visits does it need to make this much profit)

marginal analysis

Marginal analysis is looking at the added value on top of the base. For example, it looks at marginal (or extra) visits, marginal costs, marginal revenues

do marginal costs always consist only of variable costs?

No it also takes into account incremental fixed costs.

economic breakeven

Occurs when revenues are sufficient to cover all accounting costs plus provide a specified profit level.

accounting breakeven

Occurs when revenues are sufficient to cover all accounting costs; in other words, zero profitability.

managerial accounting

The field of accounting that focuses on all levels within an organization and is used internally for managerial decision making ** managerial accounting is focused on internal managers. Managerial accounting is designed to help managers plan for the future, make decisions for the company, and determine if their plans and decisions were accurate

Explain this statement: "To minimize financial risk, match the cost structure to the revenue structure."

The total profitability of the clinic would be uncertain, as it is tied to volume, but the ability of the clinic to generate a profit would be guaranteed.

Profit and Loss (P&L) Statement

a statement that summarizes the revenues, expenses, and profitability of either the entire organization or a subunit. Can be formatted in different ways for different purposes and does not conform to GAAP ** a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year.

cost accounting

considered to be a subset of managerial accounting, used to develop the expense data reported on a business's income statement. it bridges managerial and financial accounting. cost in general involves a resource use associated with providing or supporting a specific service

variable cost

cost that is directly related to the volume of services delivered. for example, the cost of clinical supplies

fixed cost

cost that isn't related to the volume of services delivered, for example, facilities costs

contribution margin

difference between per unit revenues and per unit cost and hence the amount that each unit of volume contributes to coved fixed costs and ultimately flows to profit

what are the primary differences between financial and managerial accounting?

financial focuses on organizational-level data for presentation in a businesses financial states(externally) managerial focuses on data at all levels within an organization including the entire business departments, individual services and individual patients

features and examples of fixed and variable costs

fixed costs are more or less known w/ certainty regardless of the level of volume within the relevant range. examples: expenditures on facilities, diagnostic equipment, info systems, etc. after an org. has acquired these assets, it's locked into them for some time regardless of volume. if volume decreases by a lot, an org would reduce fixed costs by shedding part of its facilities and equipment and reducing its labor force variable costs are fixed regardless of volume, other resources are more or less consumed as volume dictates. examples: costs of clinical supplies (rubber gloves, tongue depressors), diagnostic equipment leased on a per procedure basis, or paying employees on the basis of the amount of work performed. some costs are more or less predictable because of volume

relevant range

range of volume expected over some planning period. the range over which fixed costs remain constant-- if volume falls outside the relevant range, the fixed cost estimate may be invalid ** refers to a normal range of volume or normal amount of activity in which the total amount of a company's fixed costs will not change as the volume or amount of activity changes.

underlying cost structure

relationship between an organizations fixed costs, variable costs, and total costs ** the relationship between costs and volume. - also called just cost structure. - used by managers in planning, control, and decision making. - provides managers with a tool for forecasting costs at different volume levels.

variable cost rate

the variable cost of one unit of output (volume) ** a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases. Examplesof variable costs include the costs of raw materials and packaging.