A company has annual revenues of $14, 400,000. It has 2 major third party payers
ID: 2613138 • Letter: A
Question
A company has annual revenues of $14, 400,000. It has 2 major third party payers, and some of its patients are self payers. The hospital's patietn account manager estimates that 10% of the hospital's billings are paid on day 30. 60% are paid on day 60 and 30% are paid on day 90.
a. what is the average collection period ( assume 360 days per year)
b. What is the hospital's current recievables balance?
c. What would the hospital's new recievables balance if a newly proposed electronic claims system resulted in collecting from third party payers in 45 and 75 days instead of 60 and 90 days?
d. Suppose the hospital's annual cost of carrying recievables is 10%. If the electronic claims system costs $30,000 a year to lease and operte, should it be adopted? Assume that the entire recievable balance has to be finance?
Explanation / Answer
a. what is the average collection period ( assume 360 days per year)
Average collection period = 30*10% + 60*60% + 90*30%
Average collection period = 66 Days
b. What is the hospital's current recievables balance?
Hospital's current recievables balance = Average collection period/360*Annual Revenue
Hospital's current recievables balance = 66/360*14400000
Hospital's current recievables balance = $ 2640000
c. What would the hospital's new recievables balance if a newly proposed electronic claims system resulted in collecting from third party payers in 45 and 75 days instead of 60 and 90 days?
Average collection period = 30*10% + 45*60% + 75*30%
Average collection period = 52.5 Days
Hospital's new recievables balance = Average collection period/360*Annual Revenue
Hospital's new recievables balance = 52.5/360*14400000
Hospital's new recievables balance = $ 2100000
d. Suppose the hospital's annual cost of carrying recievables is 10%. If the electronic claims system costs $30,000 a year to lease and operte, should it be adopted? Assume that the entire recievable balance has to be finance?
Annual Cost of carrying =10%*2640000 = 264000
Electronic claims system costs = $ 30000
Saving in cost = 264000-30000 = 234000
Decision : It should be adopted
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