Proportion of the total cases for each payer
Commercial insurances = 0.4 × 2,000 = 800 cases
Medicare insurance = 0.25 × 2,000 = 500 cases
Medicaid insurance = 0.15 × 2,000 = 300 cases
Liability insurance = 0.15 × 2,000 = 300 cases
All others including self-pay = 0.15 × 2,000 = 300 cases
Expected rates of reimbursement
Commercial insurances = 110% × $6,200 = $6,820
Medicare insurance = $6,820
Medicaid insurance = 65% × $6,200 = $4,030
Liability insurance = 200% × $6,200 = $12,400
All others including self-pay = 100% × 6,200 = $6,200
Expected A/R
Total A/R = $14,105,000
A/R if charging the same rate for all payers
This is determined by calculating the total charge for all the payers then dividing by the total number of cases.
A/R = Total chargeNumber of cases
= 14,105,0002,000
= $7,052.50
Alternatively:
Average rate = (Individual average rate ×Proportion of the total cases)
= (0.4 × 6,820) + (0.25 × 6,200) + (0.15 × 4,030) + (0.15 × 12,400) + (0.05 × 6,200)
= 2,728 + 1,550 + 604.5 + 1,860 + 310
= $7,052.50
Liability rate = 14,105,000 × 125% = $17,631,250
Charge per case = 17,631,2502,000 = $8,815.625
Difference between the two A/R rates
Difference = TTL Gross Charges – Total A/R
= 17,631,250 - 14,105,000
= $3,526,250
As shown above, the A/R when charging the same rate for all payers is different from that when charging different rates. The difference represents the variation between the average reimbursement rate and the patient-category reimbursement rate (Rundio, 2012). It is not possible to collect the difference. The reimbursement rate is limited to the contract rate as specified in each contract with the reimbursement agency. A participating provider cannot charge more that the contract rates (Zelman, McCue & Glick, 2009). However, the provider can collect the difference from self-pay patients. The difference will be written off.
Which of these costs are fixed, variable, direct and indirect
Materials/supplies (gowns, drapes, bed sheets): these are VARIABLE/DIRECT costs. The quantity of materials and supplies used depends on the number of patients. If the provider admits many patients, the cost of materials and supplies will be higher. The cost is also specific to the patient (Zelman, McCue & Glick, 2009).
Wages (nurses, technicians): Wages of nurses and technicians are VARIABLE and INDIRECT expenses.
Utility, building, usage expense (lights, heat, and technology): FIXED. INDIRECT expense. The expense is not based on the number of patients but on factors such as the size of the building, number of computers, weather conditions, among other factors.
Medications: Medications are direct/variable expenses. The expense is patient-specific and increases with the increase in the number of patients.
Licensing of facility: Fixed. Indirect. It does not change with the number of patient days or specific patient services offered. Licensing costs for the facility depend on the facility as a whole.
Per Diem staff: Variable. Indirect. Per Diem staff changes with patient volume (nights) but not specific to a patient.
Insurances (malpractice, business etc): Fixed, Indirect.
Contribution margin
Contribution margin per case = 5,565,0002,000 = $2,782.5
Fixed cost
Total fixed cost = Fixed cost per case × Number of cases
= 1,300 × 2,000
= $2,600,000
Break-even number of cases
Break-even point = Fixed cost/Contribution margin
= 2,600,000/2,782.5
= 934.41 cases
The facility must have a minimum of 934 cases to cover all its costs, both fixed and variable. Any number below 934 cases would lead to losses.
Break-even point in revenue = BEP in cases × Average rate per case
= 934.41 × 7,052.50
= $6,589,937
= (Fixed Cost+Target profit)Contribution margin
= (2,600,000+150,000)2,782.50
= 988.32 cases
The institution must have a minimum of 988 cases to achieve the target profit of $150,000.
Optimal payer matrix (assuming the same charge for all payers)
References
Rundio, A. (2012). The nurse manager's guide to budgeting & finance. Indianapolis: Sigma Theta Tau International.
Zelman, W., McCue, M., & Glick, N. (2009). Financial management of health care organizations. San Francisco: Jossey-Bass.
