Question

Fee-for-service and capitation are both discussed in this module. These methods can be analyzed using cost volume profit analysis. In this discussion, assume the following:

• A new managed care organization (MCO) is preparing to bid on serving the 1,000 employees of ABC Manufacturing who make an average of 3 medical visits each year.
• The MCO can hire 1 physician for 350,000 SAR (annually) or can hire a Registered Nurse for 150,000 SAR (annually) and have a physician in attendance one day a week.
• A physician is able to see 4,500 patients per year.
• The nurse is able to take care of 2,000 of ABC’s medical visits (with the capacity to see 1,000 more) but needs the physician for the other 1,000 visits of the ABC members.
• MCO has to decide how much to charge ABC in their bid for the business.

Use this example to discuss either the fee-for-service or capitation method using fixed cost, variable cost, total cost, revenue, loss, profit, and break even for this healthcare organization. Your response should be both quantitative and qualitative in nature.

Be sure to support your statements with logic and argument, citing all sources that you use. Post your initial response early and check back often to continue the discussion.

Answer 1

Answer:

1. The fixed cost is 5,00,000 SAR.
2. Variable cost is 4500w +3000t.
3. Total Costs is.4500w +3000t + 500000.
4. Loss amount is 500000+4500w+3000t-4500x-3000y
5. Profit margin= -500000-4500w-3000t-+500x+3000
6. Break even point is given by 5,00,000/500x+3000y-500000-4500w-3000t.

Step-by-step explanation

Payment of each doctor receives 3,50,000 SAR(annually).

Payment of each nurse is 1,50,000 SAR(annually)

Doctors can see 4,500 patients annually.

Nurses are able to sponsor 2,000 ABC medical visits and have the ability to see 1000 another but needs a doctor for another 1000ABC visits.

Consider per unit charge of a doctor to see the patients be x SAR.

Per unit charge of nurse to visit medical camp be y SAR.

Let costs per visit be w for doctors and t for the nurses.

1. Fixed costs:

Qualitative Analysis: Fixed costs are defined as the costs which are generally fixed for any change in output. In this case of every visit of the doctors the fixed costs are the payment of the doctors and the nurses.

Quantitative Analysis: Fixed cost = 3,50,000+1,50,000 = 5,00,000SAR.

Variable Costs:

Qualitative Analysis: Variable costs are defined as the costs which are generally variable with the change in output. In this case the variable costs are the costs of visit of the doctors and the nurses which depends on the number of visits.

Quantitative Analysis: Variable Costs = (w*4500) + 2000t + (1000t) = 4500w +3000t.

Total Cost:

Qualitative Analysis: Total cost is defined as the sum of the total variable costs and the total fixed costs which includes all the costs together.

Quantitative Analysis: Total Costs = Total Variable costs + Total Fixed costs = 4500w +3000t + 500000.

Loss:

Qualitative Analysis: Loss is the negative of profit which implies the excess of costs over the revenue earned by the firm. In this case the revenue is the visit charge earned by the both doctors and the nurses and the costs are the total costs incurred..

Quantitative Analysis:

Hence Loss = 500000+4500w+3000t - 4500x-2000y-1000y= 500000+4500w+3000t-4500x-3000y

Profit:

Quantitative Analysis : Profit is the negative of loss t which implies the excess of revenue over the costs earned by the firm. In this case the revenue is the visit charge earned by the both doctors and the nurses and the costs are the total costs.

Quantitative Analysis:

Hence Profit = -500000-4500w-3000t + 4500x+ 2000y+ 1000y= -500000-4500w-3000t-+500x+3000y

Break Even Point:

Qualitative Analysis: Break even point is the point on the Total Revenue and Total costs are the same and the profit level of the healthcare firm is almost zero.

Quantitative Analysis:

Break Even Point = Fixed Costs/Contribution margin

Where contribution margin is the total sales revenue - Total sales cost.

Break Even Point = 5,00,000/500x+3000y-500000-4500w-3000t.

Reference

Cost Volume Analysis, 3.September 2020 https://www.wto.org/english/res_e/booksp_e/trade-costs-incl-growth_full_e.pdf