19. Breakeven. Sure Care Health Maintenance Organization is seeking a managed ca

Question

19. Breakeven. Sure Care Health Maintenance Organization is seeking a managed care con- tract with a local manufacturing plant. Sure Care estimates that the cost of providing preventive and curative care for the 500 employees and their families will be $120,000 per month. The manufacturing company offered Sure Care a premium bid of $250 per employee per month.

a. If Sure Care accepts this bid and contracts with the manufacturing firm, will Sure Care earn a profit or loss for the year? How much?

b. What premium per employee per month does Sure Care need to break even?

c. If Sure Care wants to earn $120,000 in profit for the year, what is the required premium per employee per month? d. What concerns Sure Care in this analysis?

Explanation / Answer

(All values in $) a. If Sure Care accepts the bid and contracts with the manufacturing firm Revenue generated 500 employees X $ 250 per month 125000 Costs or providing services 120000 Profit per month 5000 Annualised Profits 60000 b. In order to breakeven, revenue should be equal to costs Thus, for 500 employees, the revenue per month should be $ 120,000 or $ 240 per employee per month c. In case Sure Care wants to earn a profit of $ 120,000 per year, this means that the profit per month will be $ 10,000. In that case, the premium per employee per month will be $ 260 per month, since that leads to a revenue generation of $ 130,000 against costs of $ 120,000, ultimately leading to a profit of $ 10,000. d. The main concern which Sure Care will have in this analysis is the revenue which can be generated per employee per month, and additional costs, over and above the cost of providing services, which is not budgeted for.

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