7.4 Assume that Valley Forge Hospital has only the following three payer groups
ID: 2609451 • Letter: 7
Question
7.4 Assume that Valley Forge Hospital has only the following three payer groups Payer PennCare Medicare Commercial Number of Admissions 1,000 4,000 8,000 Average Revenue per Admission S5,000 4,500 7,000 Variable Cost per Admission $3,000 4,000 2,500 The hospital's fixed costs are $38 million. a. What is the hospital's net income? b. Assume that half of the 100,000 covered lives in the commercial payer group will be moved into a capitated plan. All utilization and cost data remain the same. What PMPM rate will the hospital have to charge to retain their Part a net income? c. What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent? d. Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitated group were lowered to $2,200Explanation / Answer
a. Computation of Hospital's net income:
Details
Calculations
Amount
Revenue
Admissions
Average revenue per admission
Admissions*Average revenue per admission
Penn Care
1,000
5,000
5,000,000
Medicare
4,000
4,500
18,000,000
Commercial
8,000
7,000
56,000,000
Total revenue
79,000,000
Less: Variable cost
Admissions
Variable cost per admission
Admissions*Variable cost per admission
Penn Care
1,000
3,000
3,000,000
Medicare
4,000
4,000
16,000,000
Commercial
8,000
2,500
20,000,000
Total revenue
(39,000,000)
Gross profit
40,000,000
Less: Fixed costs
(38,000,000)
Net income
2,000,000
b. Computation of PMPM (Per member per month) rate:
Given that half of the 100,000 covered lives in commercial player group will be moved to Capitated plan and all other remains same:
we have total revenue from commercial player before move = $56,000,000
After move
Commercial
4,000
7,000
28,000,000
Capitated plan
4,000
7,000
28,000,000
Total
8,000
$56,000,000
Therefore, PMPM rate = ($56,000,000 / 100,000) / 12 months
= 560 / 12 = $46,67per member per month.
c. Computation of net income, If capitated group reduce by 10% in admission rate:
Details
Calculations
Amount
Revenue
Admissions
Average revenue per admission
Admissions*Average revenue per admission
Penn Care
1,000
5,000
5,000,000
Medicare
4,000
4,500
18,000,000
Commercial
4,000
7,000
28,000,000
Capitated
(4,000*0.90%) = 3,600
7,000
25,200,000
Total revenue
76,200,000
Less: Variable cost
Admissions
Variable cost per admission
Admissions*Variable cost per admission
Penn Care
1,000
3,000
3,000,000
Medicare
4,000
4,000
16,000,000
Commercial
4,000
2,500
10,000,000
Capitated
3,600
2,500
9,000,000
Total revenue
(38,000,000)
Gross profit
38,200,000
Less: Fixed costs
(38,000,000)
Net income
200,000
d. Computation of net income, If capitated group Variable cost per admission reduce to $2,200:
Details
Calculations
Amount
Revenue
Admissions
Average revenue per admission
Admissions*Average revenue per admission
Penn Care
1,000
5,000
5,000,000
Medicare
4,000
4,500
18,000,000
Commercial
4,000
7,000
28,000,000
Capitated
3,600
7,000
25,200,000
Total revenue
76,200,000
Less: Variable cost
Admissions
Variable cost per admission
Admissions*Variable cost per admission
Penn Care
1,000
3,000
3,000,000
Medicare
4,000
4,000
16,000,000
Commercial
4,000
2,500
10,000,000
Capitated
3,600
2,200
7,920,000
Total revenue
(36,920,000)
Gross profit
39,280,000
Less: Fixed costs
(38,000,000)
Net income
1,280,000
Details
Calculations
Amount
Revenue
Admissions
Average revenue per admission
Admissions*Average revenue per admission
Penn Care
1,000
5,000
5,000,000
Medicare
4,000
4,500
18,000,000
Commercial
8,000
7,000
56,000,000
Total revenue
79,000,000
Less: Variable cost
Admissions
Variable cost per admission
Admissions*Variable cost per admission
Penn Care
1,000
3,000
3,000,000
Medicare
4,000
4,000
16,000,000
Commercial
8,000
2,500
20,000,000
Total revenue
(39,000,000)
Gross profit
40,000,000
Less: Fixed costs
(38,000,000)
Net income
2,000,000
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