Question

Explain how a CVP graphs would change in a capitated environment. Evaluate which provider is in the best position to grow its business.

Answer 1

CVP graphs helps in doing profit analysis and helps in analyzing the effects of change in volume on variables like revenue, cost and profit for an organization or an entity. In a capitated environment the CVP graph would change (compared to say graph in the fee-for-service environment) as the capitated provider will take on the insurance function. In a capitated environment the focus of the CVP graph will be on reducing costs (by seeing less patients and focusing on number of lives being treated) and not on increasing revenues by seeing more patients. The CVP graph will change as per the preventive care philosophy being practiced in a capitated environment. Also as the costs will be more of being fixed in nature (keeping in mind a fixed number of lives being covered) in a capitated environment this change will be reflected in the CVP graph.

The provider that is in the best position to grow its business is the provider that gets reimbursed by a fee-for-service. This is because in case of such providers the cost structure is entirely based on variable costs and as such each patient visit will create revenue. There will be no fixed costs and as such for such providers risks will be minimized.