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Unformatted text preview: r a service are set to cover all costs:
o Direct costs (fixed and variable)
o Overhead (indirect) costs
o Economic costs (profit) Under marginal cost pricing, prices for a service are set to cover incremental, or
marginal, costs. Often, this means recovering only direct variable costs.
Disscussion Can a provider survive if all services are priced at marginal cost? What is cross-subsidization, or price shifting? Should marginal cost pricing ever be used?
Target Costing Target costing is a management strategy used by price takers. Under target costing:
o Revenues are projected assuming prices as given in the marketplace.
o Required profits are subtracted from revenues.
o The remainder is the target cost level. What is the primary benefit of target costing?
Profit (CVP) Analysis Profit analysis, also called cost-volume-profit (CVP) analysis, is a technique used
to assess the effects of alternative volume assumptions on costs and profits.
? Why is such information valuable to health services managers?
Forecasted Profit and Loss (P&L) Statement The forecasted P&L statement uses cost structure information along with the
revenue forecast and projected volume to forecast profitability. Because it is a forecast, it can be influenced by managerial actions. Contribution Margin The contribution margin is defined as the difference between per visit (per unit)
revenue and the variable cost rate. It is the amount of each visit’s revenue that is available to:
o First cover fixed costs.
o Flow to profit when fixed costs are covered. In this illustration, the contribution margin is $100 - $28.18 = $71.82.
? What is the total contribution margin?
Breakeven Analysis Breakeven analysis is performed in many different finance contexts. In this example, it is used to determine the breakeven volume, defined as that
volume needed for an organization (or service or program) to be financially selfsufficient. There are two types of breakeven:
o Accounting breakeven (zero profit)
o Economic breakeven (with profit)
Profit Analysis Under Capitation Capitation changes the way in which profit analysis is conducted Perhaps the best way to see the effects of capitation is by graphical analysis. We will examine two approaches to graphical analysis:
o In terms of utilization (number of visits).
o In terms of membership (covered lives).
The Impact of Cost Structure on Risk If reimbursement is tied exclusively to volume (FFS), then the provider’s
financial risk is minimized if all costs are variable. If reimbursement is exclusively capitated, then the provider’s financial risk is
minimized if all costs are fixed. To illustrate, consider Atlanta Clinic (assuming an unlimited relevant range).
CHAPTER 6 – PLANNING & BUDGETING The strategic plan is the foundation of the planning process. It contains the:
o Mission statement
o Values statement
o Vision stat...
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- Spring '14