Ratio Analysis
Cdanie69
Introduction_to_the_Financial_Management_of_Health..._----_Practice_Problems_and_Self-Quizzes.pdf
I n t r o d u c t i o n ➤ t o ➤ t h e ➤ F i n a n c i a l ➤ M a n a g e m e n t ➤ o f ➤ H e a l t h c a r e ➤ O r g a n i z a t i o n s1 8 0
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Differential Cost Analysis 7
Differential Cost Analysis
Differential Cost Analysis Practice Problem
Beta Managed Care Corporation has approached XYZ Hospital for inpatient labor and delivery coverage for Beta’s subscribers. Beta will pay $5,000 per delivery. XYZ’s fixed costs per delivery are $3,000, and variable costs are $3,000. Using differential cost analysis, should XYZ Hospital accept Beta’s offer?
Study Guide:Layout 1 12/27/07 2:33 PM Page 7
8 Practice Problems and Case Study
Differential Cost Analysis Practice Problem Solution
Step 1: Gather all costs and revenues associated with each alternative.
Accept Reject Revenue $ 5,000 $ 0 Fixed Cost 3,000 3,000 Variable Costs 3,000 0 Full Cost Gain/(Loss) ($1,000) ($3,000)
Step 2: Identify and drop all sunk costs (drop $3,000 fixed cost for each alternative).
Accept Reject Revenue $5,000 $0 Fixed Cost 0 0 Variable Costs 3,000 0
Step 3: Identify and drop all costs and revenues that do not differ between the alternatives.
Accept Reject Revenue $5,000 $0 Fixed Cost 0 0 Variable Costs 3,000 0
Step 4: Select the best alternative based on the remaining cost and revenue information.
Accept Reject Revenue $5,000 $0 Fixed Cost 0 0 Variable Costs 3,000 0 Differential Cost Gain/(Loss) $2,000 $0
Conclusion: Using differential cost analysis, XYZ should accept the offer because it has a higher differential gain ($2,000) than rejecting the offer ($0).
Study Guide:Layout 1 12/27/07 2:33 PM Page 8
00_Nowicki (2339) Book.indb 180 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Differential Cost Analysis 7
Differential Cost Analysis
Differential Cost Analysis Practice Problem
Beta Managed Care Corporation has approached XYZ Hospital for inpatient labor and delivery coverage for Beta’s subscribers. Beta will pay $5,000 per delivery. XYZ’s fixed costs per delivery are $3,000, and variable costs are $3,000. Using differential cost analysis, should XYZ Hospital accept Beta’s offer?
Study Guide:Layout 1 12/27/07 2:33 PM Page 7
8 Practice Problems and Case Study
Differential Cost Analysis Practice Problem Solution
Step 1: Gather all costs and revenues associated with each alternative.
Accept Reject Revenue $ 5,000 $ 0 Fixed Cost 3,000 3,000 Variable Costs 3,000 0 Full Cost Gain/(Loss) ($1,000) ($3,000)
Step 2: Identify and drop all sunk costs (drop $3,000 fixed cost for each alternative).
Accept Reject Revenue $5,000 $0 Fixed Cost 0 0 Variable Costs 3,000 0
Step 3: Identify and drop all costs and revenues that do not differ between the alternatives.
Accept Reject Revenue $5,000 $0 Fixed Cost 0 0 Variable Costs 3,000 0
Step 4: Select the best alternative based on the remaining cost and revenue information.
Accept Reject Revenue $5,000 $0 Fixed Cost 0 0 Variable Costs 3,000 0 Differential Cost Gain/(Loss) $2,000 $0
Conclusion: Using differential cost analysis, XYZ should accept the offer because it has a higher differential gain ($2,000) than rejecting the offer ($0).
Study Guide:Layout 1 12/27/07 2:33 PM Page 8
00_Nowicki (2339) Book.indb 181 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Differential Cost Analysis 9
Differential Cost Analysis Self-Quiz Problem
The integrated delivery system you work for is thinking about dropping your sleep disorder program for financial reasons.The program serves 4,000 patients a year with annual revenues of $2 million. The variable cost per patient is $200, with allocated fixed costs to the program of $1.6million. Should your program be dropped for financial reasons?
10 Practice Problems and Case Study
Job-Order Costing
Job-Order Costing Practice Problem
XYZ Reference Lab must calculate the relative value and cost per procedure given that the total lab expense is $851,455:
Projected Labor Procedure Volume Expense ($)
A 4,000 .10 B 3,500 .05 C 2,000 .05 D 4,000 .15 E 4,500 .10 F 6,000 .10 G 2,200 .15 H 1,800 .15 I 4,000 .05 J 3,000 .10
Study Guide:Layout 1 12/27/07 2:33 PM Page 10
00_Nowicki (2339) Book.indb 182 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Differential Cost Analysis 9
Differential Cost Analysis Self-Quiz Problem
The integrated delivery system you work for is thinking about dropping your sleep disorder program for financial reasons.The program serves 4,000 patients a year with annual revenues of $2 million. The variable cost per patient is $200, with allocated fixed costs to the program of $1.6million. Should your program be dropped for financial reasons?
10 Practice Problems and Case Study
Job-Order Costing
Job-Order Costing Practice Problem
XYZ Reference Lab must calculate the relative value and cost per procedure given that the total lab expense is $851,455:
Projected Labor Procedure Volume Expense ($)
A 4,000 .10 B 3,500 .05 C 2,000 .05 D 4,000 .15 E 4,500 .10 F 6,000 .10 G 2,200 .15 H 1,800 .15 I 4,000 .05 J 3,000 .10
Study Guide:Layout 1 12/27/07 2:33 PM Page 10
00_Nowicki (2339) Book.indb 183 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Job-Order Costing 11
Job-Order Costing Practice Problem Solution
Step 1: Calculate RVUs by dividing labor expense per procedure by the average labor expense.
Labor Average Procedure Expense ($) ÷ Labor Expense ($) = RVU
A .10 .10 1.0 B .05 .10 .5 C .05 .10 .5 D .15 .10 1.5 E .10 .10 1.0 F .10 .10 1.0 G .15 .10 1.5 H .15 .10 1.5 I .05 .10 .5 J .10 .10 1.0
Step 2, Part 1: Calculate total RVUs by multiplying RVUs per procedure by projected volume.
Step 2: Calculate total cost for each procedure, a three-part process.
Procedure RVU × Projected Volume = Total RVUs
A 1.0 4,000 4,000 B .5 3,500 1,750 C .5 2,000 1,000 D 1.5 4,000 6,000 E 1.0 4,500 4,500 F 1.0 6,000 6,000 G 1.5 2,200 3,300 H 1.5 1,800 2,700 I .5 4,000 2,000 J 1.0 3,000 3,000
34,250
Step 2, Part 2: Calculate the cost per RVU by dividing total costs by total RVUs.
$851,455 ÷ 34,250 = $24.86
12 Practice Problems and Case Study
Step 2, Part 3: Calculate the cost per procedure by multiplying the cost per RVU by RVUs per procedure.
Procedure Cost/RVU ($) × RVUs/Procedure = Cost/Procedure ($)
A 24.86 1.0 24.86 B 24.86 0.5
0.5
0.5
12.43 C 24.86 12.43 D 24.86 1.5 37.29 E 24.86 1.0 24.86 F 24.86 1.0 24.86 G 24.86 1.5 37.29 H 24.86 1.5 37.29 I 24.86 12.43 J 24.86 1.0 24.86
00_Nowicki (2339) Book.indb 184 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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12 Practice Problems and Case Study
Step 2, Part 3: Calculate the cost per procedure by multiplying the cost per RVU by RVUs per procedure.
Procedure Cost/RVU ($) × RVUs/Procedure = Cost/Procedure ($)
A 24.86 1.0 24.86 B 24.86 0.5
0.5
0.5
12.43 C 24.86 12.43 D 24.86 1.5 37.29 E 24.86 1.0 24.86 F 24.86 1.0 24.86 G 24.86 1.5 37.29 H 24.86 1.5 37.29 I 24.86 12.43 J 24.86 1.0 24.86
00_Nowicki (2339) Book.indb 185 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Job-Order Costing 13
Job-Order Costing Self-Quiz Problem
Using the weighted procedure method of setting rates, calculate the relative value and cost per procedure for the following lab procedures, given a total lab cost of $1.25 million and an average hourly lab tech rate of $15 (to calculate the RVU, divide the total sample expense by the com- mon denominator of .25):
Projected Labor Supply Procedure Volume in Minutes Expense ($)
Amylase 4,000 15 .75 Bleeding time 5,000 12 .50 Uric acid 3,000 10 .50 Platelet count 7,800 09 .25 Hematocrit 7,600 0 8 .25
14 Practice Problems and Case Study
Activity-Based Costing
Activity-Based Costing Practice Problem
XYZ Home Health Care Corporation wants to develop a product cost for the following home visits using labor expense and supply expense to assign direct costs and visit minutes as a cost driver to assign indirect costs. Projected total costs for the home health care corporation are $6 million ($5 million direct and $1 million indirect). Assign costs to each visit using the following information:
Projected Labor Supply Visit Visit Volumes Expense ($) Expense ($) Minutes
Physical therapy (PT) 2,000 60 30 60 Respiratory therapy (RT) 4,000 50 20 40 Nursing 9,000 25 10 30 Occupational therapy (OT) 7,000 20 5 40
00_Nowicki (2339) Book.indb 186 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Job-Order Costing 13
Job-Order Costing Self-Quiz Problem
Using the weighted procedure method of setting rates, calculate the relative value and cost per procedure for the following lab procedures, given a total lab cost of $1.25 million and an average hourly lab tech rate of $15 (to calculate the RVU, divide the total sample expense by the com- mon denominator of .25):
Projected Labor Supply Procedure Volume in Minutes Expense ($)
Amylase 4,000 15 .75 Bleeding time 5,000 12 .50 Uric acid 3,000 10 .50 Platelet count 7,800 09 .25 Hematocrit 7,600 0 8 .25
14 Practice Problems and Case Study
Activity-Based Costing
Activity-Based Costing Practice Problem
XYZ Home Health Care Corporation wants to develop a product cost for the following home visits using labor expense and supply expense to assign direct costs and visit minutes as a cost driver to assign indirect costs. Projected total costs for the home health care corporation are $6 million ($5 million direct and $1 million indirect). Assign costs to each visit using the following information:
Projected Labor Supply Visit Visit Volumes Expense ($) Expense ($) Minutes
Physical therapy (PT) 2,000 60 30 60 Respiratory therapy (RT) 4,000 50 20 40 Nursing 9,000 25 10 30 Occupational therapy (OT) 7,000 20 5 40
00_Nowicki (2339) Book.indb 187 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Activity-Based Costing 15
Activity-Based Costing Practice Problem Solution
Step 1: Calculate the direct RVU and the indirect RVU for each visit, a two-part process.
Step 1, Part 1: Divide total sample direct cost (labor expense + supply expense) by the greatest common denominator (GCD).
Total Sample Visit Direct Cost ($) ÷ GCD =
PT 90 5 18 RT 70 5 14 Nursing 35 5 7 OT 25 5 5
Step 1, Part 2: Divide total sample indirect cost (visit minutes) by the GCD.
Total Sample Cost Visit Indirect Cost ($) ÷ GCD = Drivers
PT 60 10 6 RT 40 10 4 Nursing 30 10 3 OT 40 10 4
Step 2: Calculate the total cost for each visit, a seven-part process.
Step 2, Part 1: Calculate the total projected direct RVUs by multiplying the direct RVUs per visit by the projected volume per visit.
Projected Total Visit RVU Volume = RVUs
PT 18 2,000 36,000 RT 14 4,000 56,000 Nursing 7 9,000 63,000 OT 5 7,000 35,000
190,000
Study Guide:Layout 1 12/27/07 2:33 PM Page 15
RVUs
×
00_Nowicki (2339) Book.indb 188 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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16 Practice Problems and Case Study
Step 2, Part 2: Calculate the total projected indirect cost drivers by multiplying the indirect RVUs per visit by the projected volume per visit.
ProjectedCost Total Visit Driver × Volume = Cost Drivers
PT 6 2,000 12,000 RT 4 4,000 16,000 Nursing 3 9,000 27,000 OT 4 7,000 28,000
83,000
Step 2, Part 3: Calculate the direct cost per RVU by dividing direct costs by total direct RVUs.
$5,000,000 ÷ 190,000 = $26.32
Step 2, Part 4: Calculate the indirect cost per cost driver by dividing indirect costs by total cost drivers.
$1,000,000 ÷ 83,000 = $12.05
Step 2, Part 5: Calculate the direct cost per procedure by multiplying the direct cost per RVU by the direct RVUs in each procedure.
Direct Direct Cost/ Visit Cost/RVU ($) × RVU = Visit ($)
PT 26.32 18 473.76 RT 26.32 14 368.48 Nursing 26.32 7 184.24 OT 26.32 5 131.60
00_Nowicki (2339) Book.indb 189 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Activity-Based Costing 17
Step 2, Part 6: Calculate the indirect cost per visit by multiplying the indirect cost per cost driver by the indirect cost drivers in each procedure.
Indirect Cost/ Indirect Visit Cost Driver ($)
Cost Driver× = Cost/Visit ($)
PT 12.05 6 72.30 RT 12.05 4 48.20 Nursing 12.05 3 36.15 OT 12.05 4 48.20
Step 2, Part 7: Calculate the total cost per procedure by adding the direct cost per procedure and the indirect cost per procedure.
Direct Indirect Total Visit Cost/Visit ($) + Cost/Visit ($) = Cost/Visit ($)
PT 473.76 72.30 546.06 RT 368.48 48.20 416.68 Nursing 184.24 36.15 220.39 OT 131.60 48.20 179.80
18 Practice Problems and Case Study
Activity-Based Costing Self-Quiz Problem
Your wellness clinic wants to develop a product cost for the following activities using labor expense and supply expense to assign direct costs and visit minutes as a cost driver to assign indirect costs. Projected total costs for your wellness clinic are $600,000 ($300,000 direct and $300,000 indirect). Assign costs to each activity using the following information:
Projected Labor Supply Visit Activity Volumes Expense ($) Expense ($) Minutes
Evaluation 4,000 30 10 60 Education 3,000 50 20 40 Exercise 2,000 5 0 90
00_Nowicki (2339) Book.indb 190 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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18 Practice Problems and Case Study
Activity-Based Costing Self-Quiz Problem
Your wellness clinic wants to develop a product cost for the following activities using labor expense and supply expense to assign direct costs and visit minutes as a cost driver to assign indirect costs. Projected total costs for your wellness clinic are $600,000 ($300,000 direct and $300,000 indirect). Assign costs to each activity using the following information:
Projected Labor Supply Visit Activity Volumes Expense ($) Expense ($) Minutes
Evaluation 4,000 30 10 60 Education 3,000 50 20 40 Exercise 2,000 5 0 90
00_Nowicki (2339) Book.indb 191 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Breakeven Analysis 19
Breakeven Analysis
Breakeven Analysis Practice Problem
Assume the following for XYZ Medical Supply Vendor:
Fixed cost = $20,000 Selling price = $1,000 Variable cost = $600
What is the breakeven point in units? In dollars?What is the contribution margin in percent? In dollars?
Breakeven Analysis Practice Problem Solution
Breakeven point in units
Total fixed costs $20,000 Price – Variable costs
= $1,000 – $600
= 50 units
Breakeven point in dollars
Breakeven units x Price = 50 x $1,000 = $50,000
Contribution margin in percent
Price – Variable costs $1,000 – $600 Price
= $1,000
= .40, or 40%
Contribution margin in dollars
Price – Variable cost = $1,000 – $600 = $400
20 Practice Problems and Case Study
Study Guide:Layout 1 12/27/07 2:33 PM Page 20
00_Nowicki (2339) Book.indb 192 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Breakeven Analysis 19
Breakeven Analysis
Breakeven Analysis Practice Problem
Assume the following for XYZ Medical Supply Vendor:
Fixed cost = $20,000 Selling price = $1,000 Variable cost = $600
What is the breakeven point in units? In dollars?What is the contribution margin in percent? In dollars?
Breakeven Analysis Practice Problem Solution
Breakeven point in units
Total fixed costs $20,000 Price – Variable costs
= $1,000 – $600
= 50 units
Breakeven point in dollars
Breakeven units x Price = 50 x $1,000 = $50,000
Contribution margin in percent
Price – Variable costs $1,000 – $600 Price
= $1,000
= .40, or 40%
Contribution margin in dollars
Price – Variable cost = $1,000 – $600 = $400
20 Practice Problems and Case Study
Study Guide:Layout 1 12/27/07 2:33 PM Page 20
00_Nowicki (2339) Book.indb 193 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Breakeven Analysis 21
Breakeven Analysis Self-Quiz Problem
Assume the following for your facility:
Fixed cost = $10,000 Selling price = $100 Variable cost = $20
What is the breakeven point in units? In dollars?What is the contribution margin in percent? In dollars?
Breakeven Analysis 19
Breakeven Analysis for Capitated Revenue
Breakeven Analysis for Capitated Revenue Practice Problem
An obstetrician/gynecologist (OB/GYN) practice is considering a capitated agreement with an accountable care organization whereby the practice would provide OB/GYN coverage to a 5,000-member plan and receive $50 per member per month. Variable costs are projected to be $300 per visit, and fixed costs allocated to the agreement are projected to be $600,000 per year. If the practice wants to make a $250,000 profit, what is the breakeven point in visits each year?
00_Nowicki (2339) Book.indb 194 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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Breakeven Analysis 19
Breakeven Analysis for Capitated Revenue
Breakeven Analysis for Capitated Revenue Practice Problem
An obstetrician/gynecologist (OB/GYN) practice is considering a capitated agreement with an accountable care organization whereby the practice would provide OB/GYN coverage to a 5,000-member plan and receive $50 per member per month. Variable costs are projected to be $300 per visit, and fixed costs allocated to the agreement are projected to be $600,000 per year. If the practice wants to make a $250,000 profit, what is the breakeven point in visits each year?
00_Nowicki (2339) Book.indb 195 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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I n t r o d u c t i o n ➤ t o ➤ t h e ➤ F i n a n c i a l ➤ M a n a g e m e n t ➤ o f ➤ H e a l t h c a r e ➤ O r g a n i z a t i o n s1 9 6
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Breakeven Analysis for Capitated Revenue Practice Problem Solution
Profit = Revenue – (Fixed costs + [Variable cost per visit x Total visits])
Total visits = 7,167 visits (more than 7,167 visits would result in a profit below the desired $250,000)
20 Practice Problems and Case Study
$250,000 = $3,000,000 – ($600,000 + [$300 x Total visits])
Breakeven Analysis for Capitated Revenue Self-Quiz Problem
Bend-Me-Straight (BMS) is considering a capitated agreement with a compre- hensive care for joint replacement program (CJR) that would provide $200 per patient per year for 100 patients. If BMS wants to make a $2,000 profit on the program and if fixed costs are $5,000, BMS must keep variable costs per patient under what amount in order to make the desired profit?
00_Nowicki (2339) Book.indb 196 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
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C h a p t e r ➤ 8 : ➤ C o s t ➤ A c c o u n t i n g 1 9 7
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Breakeven Analysis for Capitated Revenue Self-Quiz Problem
Bend-Me-Straight (BMS) is considering a capitated agreement with a compre- hensive care for joint replacement program (CJR) that would provide $200 per patient per year for 100 patients. If BMS wants to make a $2,000 profit on the program and if fixed costs are $5,000, BMS must keep variable costs per patient under what amount in order to make the desired profit?
00_Nowicki (2339) Book.indb 197 5/17/17 10:57 AM
Nowicki, M. (2017). Introduction to the financial management of healthcare organizations, seventh edition. Health Administration Press. Created from capella on 2022-11-01 21:07:23.
C op
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2 01
7. H
ea lth
A dm
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io n
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