After reading THE INFO BELOW discuss some ideas and strategies you might have for reimbursement options that can help control these costs.

Introduction

As policymakers consider various ways to contain the rising costs of health care, it is useful to examine the patterns of spending on health care throughout the United States. In 2004, the United States spent $1.9 trillion, or 16 percent of its gross domestic product (GDP), on health care. This averages out to about $6,280 for each man, woman, and child. However, actual spending is distributed unevenly across individuals, different segments of the population, specific diseases, and payers. For example, analysis of health care spending shows that: • Five percent of the population accounts for almost half (49 percent) of total health care expenses. • The 15 most expensive health conditions account for 44 percent of total health care expenses. • Patients with multiple chronic conditions cost up to seven times as much as patients with only one chronic condition. Further detailed analyses of these spending patterns, how they change over time, and how they affect different payers such as Medicare, Medicaid, private insurers, employers, and consumers shed important light on how to best target efforts to contain rapidly rising health care costs. Much of the information included in this report comes from the Medical Expenditure Panel Survey. (See Box 1.)

Background

Health care expenses in the United States rose from $1,106 per person in 1980 ($255 billion overall) to $6,280 per person in 2004 ($1.9 trillion overall).1 During this period, health care costs grew faster than the economy as a whole. As a consequence, health spending now accounts for 16 percent of the GDP, compared to 9 percent in 1980. With the aging of the population and the accelerating pace of medical innovation, this trend is likely to continue. Those struggling to develop strategies to reduce or contain costs consider whether efforts should be targeted broadly across the entire health care system or more narrowly at specific areas or aspects of care. For example, is the continuing rise in health care expenses due to the increased. cost of treatment per case? To the growth and aging of the population? To the rise in the number of people treated for the most expensive conditions? Examining the distribution of health care expenses among the U.S. population helps to determine the expenses for different segments of the population, what diseases cost the most, and how public and private payers are affected. This information sheds light on areas where changes in policy might bring about the greatest savings.

How are U.S. health care expenses distributed?

A small proportion of the total population accounts for half of all U.S. medical spending Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount.2 In 2002, the 5 percent of the U.S. community (civilian noninstitutionalized) population that spent the most on health care accounted for 49 percent of overall U.S. health care spending (Chart 1). Among this group, annual medical expenses (exclusive of health insurance premiums) equaled or exceeded $11,487 per person. In contrast, the 50 percent of the population with the lowest expenses accounted for only 3 percent of overall U.S. medical spending, with annual medical spending below $664 per person. Thus, those in the top 5 percent spent, on average, more than 17 times as much per person as those in the bottom 50 percent of spenders.2 From 1977 to 1996, the overall distribution of health care expenses among the U.S. population remained remarkably stable (Table 1), according to data from MEPS and its predecessor surveys.3,4 In 1977, the 1 percent of the population with the highest expenses accounted for 27 percent of all expenses, the top 5 percent accounted for 55 percent, and the bottom 50 percent accounted for 3 percent. However, the concentration of expenses at the top has decreased in recent years. The total expenses accounted for by the top 1 percent of spenders declined from 28 percent in 1996 to 22 percent in 2002, and the amount for the top 5 percent dropped from 55 to 49 percent in the same time period.4 The lower 50 percent of spenders remained at 3 to 4 percent of total expenditures during this period.

Older people are much more likely to be among the top-spending percentiles The elderly (age 65 and over) made up around 13 percent of the U.S. population in 2002, but they consumed 36 percent of total U.S. personal health care expenses. The average health care expense in 2002 was $11,089 per year for elderly people but only $3,352 per year for working-age people (ages 19-64).5 Similar differences among age groups are reflected in the data on the top 5 percent of health care spenders. People 65-79 (9 percent of the total population) represented 29 percent of the top 5 percent of spenders. Similarly, people 80 years and older (about 3 percent of the population) accounted for 14 percent of the top 5 percent of spenders (Chart 2).2 However, within age groups, spending is less concentrated among those age 65 and over than for the under-65 population. The top 5 percent of elderly spenders accounted for 34 percent of all expenses by the elderly in 2002, while the top 5 percent of non-elderly spenders accounted for 49 percent of expenses by the non-elderly.4 A principal reason why health care spending is spread out more evenly among the elderly is that a much higher proportion of the elderly than the nonelderly have expensive chronic conditions. Studies show initial persistence of expenses The data just cited show that health care expenses are heavily concentrated in a single year. Over a 2-year period, there is a fairly high degree of persistence of expenditures.6 Of those individuals ranked at the top 1 percent of the health care expenditure distribution in 2002, 25 percent maintained this ranking with respect to their 2003 health care expenditures The proportion of the population that remained in the top 1 percent from 1996 to 1997 was only 14 percent. This means that the proportion of the population in the highest percentile of the health care expenditure distribution that retained this ranking from 2002 to 2003 was nearly double the proportion in the 1996-97 period.7 In 2002, the top 5 percent of the population accounted for 49 percent of health care expenditures. Of people ranked in the top 5 percent of the health care expenditure distribution, 34 percent retained this ranking with respect to their 2003 health care expenditures. Similarly, the top 10 percent of the population accounted for 64 percent of overall health care expenditures in 2002, and 42 percent of this subgroup retained the top decile ranking with respect to their 2003 health care expenditures. Over longer periods of time, a considerable leveling of expenses takes place. In a study of Medicare enrollees, researchers found that although the top 1 percent of spenders accounted for 20 percent of expenses in a particular year, the top 1 percent of spenders over a 16-year period accounted for only 7 percent of expenses.8 The researchers concluded that there is a substantial leveling of expenses across a population when looking over several years or more compared to just a single year. An acute episode of pneumonia or a motor vehicle accident might lead to an expensive hospitalization for an otherwise healthy person, who might be in the top 1 percent for just that year but have few expenses in subsequent years. Similarly, many people have chronic conditions, such as diabetes and asthma, which are fairly expensive to treat on an ongoing basis for the rest of their lives, but in most years will not put them at the very top of health care spenders. However, each year some of those with chronic conditions will have acute episodes or complications requiring a hospitalization or other more expensive treatment. The Medicare study just discussed8 did not control for factors such as the overall increase in the quantity and intensity of services over time. Another study controlled for these factors in examining how the distribution of expenses changes over the major phases of an average person’s lifetime.9 The study used insurance company data on 3.75 million enrollees and data from the Medicare Current Beneficiary Survey.a It found that 8 percent of health care expenses occurred during childhood (under age 20), 13 percent during young adulthood (20-39 years), 31 percent during middle age (40-64 years), and nearly half (49 percent) occurred after 65 years of age. Among people age 65 and older, three-quarters of expenses (or 37 percent of the lifetime total) occurred among individuals 65-84 and the rest (12 percent of the lifetime total) among people 85 and over. The total per capita lifetime expense was calculated to be $316,600. People with high overall health expenses also have high out-of-pocket expenses relative to income Out-of-pocket costs can impose a significant financial burden on individuals and families. These expenses include deductibles, copayments, and payments for services that are not covered by health insurance. Over half the people in the top 5 percent of all health care spenders had out-ofpocket expenses (not including out-of-pocket health insurance premiums) over 10 percent of family income. More specifically: • Thirty-four percent had out-of-pocket medical expenses that exceeded 10 percent of family income. • Eighteen percent had out-of-pocket expenses in excess of 20 percent of family income. People in the bottom 50 percent of the distribution were much less likely to have financial burdens from medical care. For example: • Five percent of people in the bottom 50 percent had out-of-pocket expenses that exceeded 10 percent of family income. • Three percent had out-of-pocket expenses greater than 20 percent of family income.2 People with high health care expenses have lower health status How people view their own health is strongly correlated with their level of health care expenses. Using a respondent-reported overall health status measure (ranging from poor to excellent), a study based on MEPS 2002 data found that people in the highest 5 percent of the distribution of medical expenses were 11 times as likely to be in fair or poor physical health as people in the bottom half of that distribution (45 percent vs. 4 percent).

Choco Inc. buys chocolate from Switzerland and resells it in the U.S. It just purchased chocolate invoiced
at SF50,000. Payment for the invoice is due in 30 days. Assume that the current exchange rate of the
Swiss franc is $1.00. Also assume that three call options for the franc are available. The first option has a
strike price of $1.00 and a premium of $.03; the second option has a strike price of $1.03 and a premium
of $.01; the third option has a strike price of $1.06 and a premium of $.005. Choco Inc. expects a modest
appreciation in the Swiss franc.
a) (5 points) Describe how Choco Inc. could construct a bullspread using the first two options. What is
the cost of this hedge? When is this hedge most effective? When is it least effective?
b) (5 points) Describe how Choco Inc. could construct a bullspread using the first and the third options.
What is the cost of this hedge? When is this hedge most effective? When is it least effective?
c) (5 points) Given your answers to parts (a) and (b), what is the tradeoff involved in constructing a
bullspread using call options with a higher exercise price?

Which of the following best describes a cap-and-trade system?

he U.S. health care system tends to emphasize __________.

How is Medicaid funded?

What is the Superfund?

What is the potential for renewable energy to contribute to the U.S. energy supply in the foreseeable future?

Which statement accurately describes health care spending in the United States?

7. Reducing reliance on human workers and instead investing heavily in computers and online technology will

Select one:

a. have no effect on the relative proportion of fixed and variable costs

b. make the company less susceptible to economic swings

c. reduce fixed costs and increase variable costs

d. reduce variable costs and increase fixed costs

8. Both direct materials and indirect materials are

Select one:

a. raw materials

b. fixed costs

c. manufacturing overhead

d. selling expenses

9. The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is

Select one:

a. indirect labor

b. direct labor

c. manufacturing overhead

d. indirect materials

10. The product cost that is most difficult to associate with a product is

Select one:

a. direct labor

b. manufacturing overhead

c. direct materials

d. advertising expenses

11. A manufacturing company calculates cost of goods sold as follows:

Select one:

a. Ending FG inventory – cost of goods manufactured + beginning FG inventory

b. Beginning FG inventory + cost of goods purchased – ending FG inventory

c. Beginning FG inventory + cost of goods manufactured – ending FG inventory

d. Beginning FG inventory – cost of goods manufactured – ending FG inventory

12. Walker Company reported the following year-end information:

Beginning work in process inventory                             $ 46,000

Beginning raw materials inventory                                    24,000

Ending work in process inventory                                     50,000

Ending raw materials inventory                                         20,000

Raw materials purchased                                                830,000

Direct labor                                                                      240,000

Manufacturing overhead                                                 100,000

How much is Walker’s cost of goods manufactured for the year?

Select one:

a. $1,170,000

b. $1,178,000

c. $1,174,000

d. $834,000

Deacon Company is a merchandising company that is preparing a budget for the three-month period ended June 30th. The following information is available

Budgeting Assumptions:

A) 60% of sales are cash sales and 40% of sales are credit sales. Twenty percent of all credit sales are collected in the month of sale and the remaining 80% are collected in the month subsequent to the sale.

B) Budgeted sales for July are $208,000.

C) 10% of merchandise inventory purchases are paid in cash at the time of the purchase. The remaining 90% of purchases are credit purchases. All purchases on credit are paid in the month subsequent to the purchase.

D) Each month’s ending merchandise inventory should equal $10,000 plus 50% of the next month’s cost of goods sold.

E) Depreciation expense is $1,100 per month. All other selling and administrative expenses are paid in full in the month the expense is incurred.

Required:

-ONLY ANSWER #4

1. Calculate the expected cash collections for April, May, and June.

-April = $145,040 May = $174,800 June = $191,600 Quarter $511,440

2. Calculate the budgeted merchandise purchases for April, May, and June.

-April=$103,800 May=$112,800 June=$121,800 Total=$338,400

3. Calculate the expected cash disbursements for merchandise purchases for April, May, and June.

-April=$81,480 May=$104,700 June=$113,700 Quarter=$299,880

4. Prepare a budgeted balance sheet at June 30th. (Hint: You need to calculate the cash paid for selling and administrative expenses during April, May, and June to determine the cash balance in your June 30th balance sheet.)

Required information

[The following information applies to the questions displayed below.]

Iguana, Inc., manufactures bamboo picture frames that sell for $30 each. Each frame requires 4 linear feet of bamboo, which costs $2.50 per foot. Each frame takes approximately 30 minutes to build, and the labor rate averages $12 per hour. Iguana has the following inventory policies:

• Ending finished goods inventory should be 40 percent of next month’s sales.
• Ending direct materials inventory should be 30 percent of next month’s production.

Expected unit sales (frames) for the upcoming months follow:

Variable manufacturing overhead is incurred at a rate of $0.40 per unit produced. Annual fixed manufacturing overhead is estimated to be $7,800 ($650 per month) for expected production of 3,000 units for the year. Selling and administrative expenses are estimated at $700 per month plus $0.50 per unit sold.

Iguana, Inc., had $10,900 cash on hand on April 1. Of its sales, 80 percent is in cash. Of the credit sales, 50 percent is collected during the month of the sale, and 50 percent is collected during the month following the sale.

Of direct materials purchases, 80 percent is paid for during the month purchased and 20 percent is paid in the following month. Direct materials purchases for March 1 totaled $2,500. All other operating costs are paid during the month incurred. Monthly fixed manufacturing overhead includes $160 in depreciation. During April, Iguana plans to pay $3,100 for a piece of equipment.

Required:
Compute the following for Iguana, Inc., for the second quarter (April, May, and June).     

Required information

[The following information applies to the questions displayed below.]

Iguana, Inc., manufactures bamboo picture frames that sell for $30 each. Each frame requires 4 linear feet of bamboo, which costs $3.00 per foot. Each frame takes approximately 30 minutes to build, and the labor rate averages $11 per hour. Iguana has the following inventory policies:

• Ending finished goods inventory should be 40 percent of next month’s sales.
• Ending direct materials inventory should be 30 percent of next month’s production.

Expected unit sales (frames) for the upcoming months follow:

Variable manufacturing overhead is incurred at a rate of $0.30 per unit produced. Annual fixed manufacturing overhead is estimated to be $9,600 ($800 per month) for expected production of 4,000 units for the year. Selling and administrative expenses are estimated at $850 per month plus $0.60 per unit sold.

Iguana, Inc., had $12,800 cash on hand on April 1. Of its sales, 80 percent is in cash. Of the credit sales, 50 percent is collected during the month of the sale, and 50 percent is collected during the month following the sale.

Of direct materials purchases, 80 percent is paid for during the month purchased and 20 percent is paid in the following month. Direct materials purchases for March 1 totaled $3,500. All other operating costs are paid during the month incurred. Monthly fixed manufacturing overhead includes $200 in depreciation. During April, Iguana plans to pay $3,500 for a piece of equipment.

Required:
Compute the following for Iguana, Inc., for the second quarter (April, May, and June).     

April May June 2nd Quarter Total

1.Budgeted Sales Revenue $9,000 $10,500 $13,500 $33,000

2.Budgeted Production in Units 120 140 180 440

3.Budgeted Cost of Direct Material Purchases $0

4.Budgeted Direct Labor Cost $0

5.Budgeted Manufacturing Overhead $0

6.Budgeted Cost of Goods Sold $8,100 $9,400 $12,150   $29,650

7.Total Budgeted Selling and Administrative Expenses $0.00

Required information

[The following information applies to the questions displayed below.]

Iguana, Inc., manufactures bamboo picture frames that sell for $25 each. Each frame requires 4 linear feet of bamboo, which costs $2.50 per foot. Each frame takes approximately 30 minutes to build, and the labor rate averages $14 per hour. Iguana has the following inventory policies:

• Ending finished goods inventory should be 40 percent of next month’s sales.
• Ending direct materials inventory should be 30 percent of next month’s production.

Expected unit sales (frames) for the upcoming months follow:

Variable manufacturing overhead is incurred at a rate of $0.40 per unit produced. Annual fixed manufacturing overhead is estimated to be $7,200 ($600 per month) for expected production of 4,500 units for the year. Selling and administrative expenses are estimated at $650 per month plus $0.50 per unit sold.

Iguana, Inc., had $11,200 cash on hand on April 1. Of its sales, 80 percent is in cash. Of the credit sales, 50 percent is collected during the month of the sale, and 50 percent is collected during the month following the sale.

Of direct materials purchases, 80 percent is paid for during the month purchased and 20 percent is paid in the following month. Direct materials purchases for March 1 totaled $4,500. All other operating costs are paid during the month incurred. Monthly fixed manufacturing overhead includes $340 in depreciation. During April, Iguana plans to pay $3,500 for a piece of equipment.

Required:
Compute the following for Iguana, Inc., for the second quarter (April, May, and June).     

Problem 8-29 Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10]

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

1. The gross margin is 25% of sales.

2. Actual and budgeted sales data:

3. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.

4. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.

5. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.

6. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,000 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $927 per month (includes depreciation on new assets).

7. Equipment costing $1,200 will be purchased for cash in April.

8. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

Using the preceding data:

1. Complete the schedule of expected cash collections.

2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases.

3. Complete the cash budget.

4. Prepare an absorption costing income statement for the quarter ended June 30.

5. Prepare a balance sheet as of June 30.

Problem 8-29 Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10] The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods: Current assets as of March 31: Cash $ 8,000 Accounts receivable $ 22,000 Inventory $ 42,600 Building and equipment, net $ 130,800 Accounts payable $ 25,425 Common stock $ 150,000 Retained earnings $ 27,975 The gross margin is 25% of sales. Actual and budgeted sales data: March (actual) $ 55,000 April $ 71,000 May $ 76,000 June $ 101,000 July $ 52,000 Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,800 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $981 per month (includes depreciation on new assets). Equipment costing $2,000 will be purchased for cash in April. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the preceding data: 1. Complete the schedule of expected cash collections. 2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases. 3. Complete the cash budget. 4. Prepare an absorption costing income statement for the quarter ended June 30. 5. Prepare a balance sheet as of June 30.