HealthCare Finance questions

7.1

Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service.  Here are relevant data estimates:

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Variable cost per visit               \$      5.00

Annual direct fixed costs         \$500,000

Annual overhead allocation    \$  50,000

Expected annual utilization         10,000

a.     What per-visit price must be set for the service to break even?

To earn an annual profit of \$100,000?

b.     Repeat Part a, but assume that the variable cost per visit is \$10.

c.      Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are \$1,000,000.

d.     Repeat Part a assuming both \$10 in variable cost and \$1,000,000 in direct

fixed costs.

7.2

The audiology department at Randall Clinic offers many services to the clinicâ€™s patients.  The three most common, along with cost and utilization data, are as follows:

Variable Cost             Annual Direct            Annual Number

Service                          per Service                 Fixed Costs                   of Visits

Basic examination               \$ 5                           \$50,000                          3,000

Advanced examination         7                              30,000                          1,500

Therapy session                   10                               40,000                            500

a.     What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs?

b.     Assume that the audiology department is allocated \$100,000 in total overhead by the clinic, and the department director has allocated \$50,000 of this amount to the three services listed above.

What is the fee schedule assuming that these overhead costs must be covered? (To answer this question, assume that the allocation of overhead costs to each service is made on the basis of number of visits.)

c.      Assume that these services must make a combined profit of \$25,000.

Now what is the fee schedule? (To answer this question, assume that the profit requirement is allocated in the same way as overhead cost.)