Use the following data to calculate the variances in problems 7–10. You have bee

Question

Use the following data to calculate the variances in problems 7–10.

You have been asked by management to explain the variances in costs under your inpatient capitated contract. The following data is provided.

                                                                      Budget              Actual

                        Inpatient Costs                 $12,568,500    $16,618,350

                        Members                                   42,000             42,000

                        Admission Rate                          0.070               0.095

                        Case Mix Index                            0.90                 0.85

                        Cost per Case (CMI = 1.0)        $4,750             $4,900

8. What dollar effect did the increased admission rate have on cost?

Explanation / Answer

The Variance in total costs [Budgeted v/s Actual] under inpatient capitated contract

= ($16,618,350 - $12,568,500) / $12,568,500= 32.22% increase

This variance in total costs can be explained as follows:

Total Cost is calculated as= (Total registered members * Admissions rate) * (Cost Per Case * Case Mix Index)

for Budgeted total cost= (42000*0.070) * (4750*0.90)= $12,568,500

for Actual total cost= (42000*0.095) * (4900*0.85)= $16,618,350

with same number of registered members i.e 42000 given for both budgeted and actual, there is no variance contribution by this factor: no variance..

With Admissions rate varying from 0.070 of budgeted to 0.095 of Actual, the % contribution to the variance in cost

= (0.095 - 0.070) / 0.070= 0.025 / 0.070= 35.71% increase

With Cost per Case (CMI = 1.0) varying from $4750 of budgeted to $4900 of Actual, the % contribution to the variance in cost= ($4900 - $4750) / $4750= 3.16% increase

With Case Mix Index varying from 0.90 of Budgeted to 0.85 of actual, the % contribution to the variance in cost=

(0.90 - 0.85) / 0.85= 0.05 / 0.85= 5.88 % decrease

Thus Cost Per Case under each scenario with actual CMIs= $4275 for Budgeted and $4165 for Actual representing a decrease of 2.6411%

Thus, the Cost Per Case variance contribution= -2.6411%

Thus, if the total budgeted cost is $100 then after the above variances, it will be=

$100*(1+0.35714)*(1-0.026411)= 132.13 ===> 32.13% increase; which is approximately equal to 32. 22% increase as calculated above.

The dollar effect of increased admission rate on total cost assuming other factors being constant adn unchanged= 0.025*42000*(4750*0.9)= $4,488,750..

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