Healthcare Finance Case 2

Health Care Services Reimbursement

Case Assignment

Pearland Medical Center owns a small satellite clinic, specializing
in General Practice, located at nearby Pearland airport. General
Practice Clinic’s sole payor is Air Health, a health care plan that
covers the airport employee population. Air Health has been paying on a
fee-for-service basis; however, recently, its covered population
increased and it proposed a capitation contract for the next year with
an annual capitation payment of $150 for each of its 20,000 covered
members.

Previous experience indicates that the covered population will
average 2 visits per year to General Practice Clinic. General Practice
Clinic generates annually $1,150,000 fixed cost, which includes $550,000
in direct cost and $600,000 in allocated overhead. Each visit to
General Practice Clinic generates $45 in variable costs.

  1. Construct the base pro forma profit and loss statement on the capitation contract based on the number of visits for the clinic.
  2. What is the clinic’s contribution margin on the contract? What is
    the clinic’s breakeven point under this capitation contract in the
    number of visits?
  3. Construct the base pro forma profit and loss statement on the capitation contract based on the number of members for the clinic.
  4. What is the clinic’s breakeven point under this capitation contract in the number of members?
  5. Should the clinic accept the contract terms?
  6. What elements of CVP analysis change when a clinic moves from a fee-for-service to a capitated environment?
  7. How do provider incentives change when it moves from a fee-for-service to a capitated contract?

Length: 3–4 pages, excluding title page and references.

Assignment Expectations

Assessment and Grading: Your paper will be assessed based on the
performance assessment rubric that is linked within the course. Review
it before you begin working on the assignment.

Your submission should meet the guidelines on file format, in-text
citations and references, scholarly sources, scholarly writing, and use
of direct quotes noted under Module 1 Assignment Expectations.

Required Reading

Berenson, R. A., & Rich, E. C. (2010). U.S. approaches to physician payment: The deconstruction of primary care. Journal of General Internal Medicine, 25(6), 613-618.

Chang, K. & Said, A.A. (2014). The impact of outsourcing on hospital performance. International Journal of Management Accounting Research, suppl. Special Issue. Health Care Costs and Performance, 4(1), 7-26.

Hennig-Schmidt, H., Selten, R., & Wiesen, D. (2011). How payment
systems affect physicians’ provision behavior – An experimental
investigation. Journal of Health Economics, 30(4), 637-646.

Expert Solution Preview

Introduction:
The following paper provides answers to a case assignment on Health Care Services Reimbursement. The case involves analyzing a capitation contract proposal from a health care plan, which covers the airport employee population. The General Practice Clinic located near the Pearland airport is approached by Air Health to accept a capitation contract with an annual capitation payment of $150 for each of its 20,000 covered members. The paper answers seven questions related to the case, including constructing a base pro forma profit and loss statement, calculating contribution margins and break-even points, analyzing CVP analysis elements, and assessing provider incentives when moving from a fee-for-service to a capitated contract.

Answer 1:
The base pro forma profit and loss statement can be constructed on the capitation contract based on the number of visits for the clinic. According to the question, the covered population will average 2 visits per year to the General Practice Clinic. The clinic generates annual fixed costs of $1,150,000, which includes $550,000 in direct costs and $600,000 in allocated overhead. Each visit to the clinic generates $45 in variable costs. Therefore, the total variable cost comes out to be $90 (45*2). The total revenue can be calculated by multiplying the number of covered members (20,000) with their annual capitation payment ($150). Hence, the total revenue generated will be $3,000,000 (20,000*150). The base pro forma profit and loss statement can be calculated as follows:
Total Revenue – Total Variable Cost – Fixed Cost = Profit/Loss
$3,000,000 – $90,000 – $1,150,000 = $1,760,000 (profit)

Answer 2:
The clinic’s contribution margin on the contract can be calculated by subtracting the total variable cost from the total revenue. Therefore, the contribution margin will be $2,910,000 (3,000,000-90,000). The clinic’s breakeven point under this capitation contract in the number of visits can be calculated by dividing the total fixed cost by the contribution margin per visit. The total fixed cost is $1,150,000, and the contribution margin per visit is $45. Hence, the breakeven point in the number of visits will be 25,556 (1,150,000/45).

Answer 3:
The base pro forma profit and loss statement can be constructed on the capitation contract based on the number of members for the clinic. The clinic has a covered population of 20,000 members. The fixed cost remains the same at $1,150,000, which includes $550,000 in direct costs and $600,000 in allocated overhead. The variable cost per member can be calculated by dividing the total variable cost by the number of visits per member. Each covered member will have two visits per year, so the variable cost per member will be $90 (45*2). Therefore, the total variable cost would be $1,800,000 (20,000*90). The total revenue can be calculated by multiplying the number of covered members (20,000) with their annual capitation payment ($150). Hence, the total revenue generated will be $3,000,000 (20,000*150). The base pro forma profit and loss statement can be calculated as follows:
Total Revenue – Total Variable Cost – Fixed Cost = Profit/Loss
$3,000,000 – $1,800,000 – $1,150,000 = $50,000 (profit)

Answer 4:
The clinic’s breakeven point under this capitation contract in the number of members can be calculated by dividing the total fixed cost by the contribution margin per member. The total fixed cost is $1,150,000, and the contribution margin per member is $60 (150-90). Hence, the breakeven point in the number of members will be 19,167 (1,150,000/60).

Answer 5:
Whether the clinic should accept the contract terms depends on its financial objectives and performance expectations. Based on the provided information, the clinic will generate a profit of $1,760,000 in the first year if it accepts the capitation contract. If the clinic predicts that the number of visits per patient will increase in the future or anticipates a higher covered population, accepting the contract could prove to be beneficial in the long run. However, if the clinic expects costs to increase, it should perform a sensitivity analysis to understand the potential impact on revenue and profitability.

Answer 6:
When a clinic moves from a fee-for-service to a capitated environment, several elements of CVP analysis changes. In a fee-for-service model, revenues are proportional to the number of visits or procedures conducted, whereas in a capitated model, revenues are fixed based on the number of covered members. Therefore, clinics need to manage costs effectively to prevent losses due to over-utilization or underutilization of services. The variable cost per visit decreases for the clinic when moving to a capitated environment, as covered members are entitled to two visits annually, whereas this is not the case in a fee-for-service model. Additionally, contribution margins may also change, which is an important indicator of profitability.

Answer 7:
Provider incentives change when moving from a fee-for-service to a capitated contract. In a fee-for-service model, physicians are incentivized to perform more visits, tests, or procedures as it generates higher revenue for the clinic. However, in a capitated model, physicians are incentivized to provide efficient and cost-effective care as the revenue is fixed. Therefore, providers need to focus on minimizing costs while still providing quality care. The capitation model encourages a team-based approach to care, where physicians and other healthcare professionals work together to meet the needs of the population. This shift in incentives can lead to improved quality of care and increased patient satisfaction.

Share This Post

Email
WhatsApp
Facebook
Twitter
LinkedIn
Pinterest
Reddit

Order a Similar Paper and get 15% Discount on your First Order

Related Questions

Describe and critique a current article that relates to Nursing Assignment Help

Describe and critique a current article that relates to hospital financing and competitive practices in healthcare. (Article should be from a scholarly, peer-reviewed journal published within the last 3-5 years). Submit 1,000-1,500-word paper with a KU title page and reference page in a scholarly format. You are a medical professor

GCU Patient Preferences in Care Discussion Reply Nursing Assignment Help

please respond to the following discussion as a peer making a comment. Hello everyone, Integrating patient preferences and values with clinician expertise is essential when making evidence-based decisions. This approach leads to patient-centered care, improves treatment adherence, and enhances health outcomes. Patients’ unique values, beliefs, priorities, and circumstances can significantly

UM Administrator in Training Rotation Experience Report Nursing Assignment Help

Complete and Submit the Three Sections of the Report for the Assignment: AIT Experience: LTC Settings and Services Report Template (ATTACHED) APA: Include APA 7th Edition Formatted Reference Page. ALL RESPONSES IN PARAGRAPH FORM. Complete Section 1 of the Report Select the Long Term Care (LTC) Settings and Services: ALREADY

NYU Autoimmune Disease of Myelin Abstract Nursing Assignment Help

`The disease is called MS You should read Wikipedia “Immune System”, “Antibody”,  “Antigen”, “T  cell”, “B cell”, “Macrophage”, “Dendritic cell”  for writing your abstract. It would also be good to read the Wikipedia article on MS.  The purpose of writing an abstract is to condense the material you have read

Within the Professions of Psychology Paper Nursing Assignment Help

PSY 540 Final Project Guidelines and Rubric Overview Within the professions of psychology, it can be typical for you to work on proposals for programs, studies, or new initiatives. For example, you may work for a university that regularly partners with foundations and corporations to identify grant opportunities for projects

Professional Ethics Instructions Baccalaureate education Nursing Assignment Help

Professional Ethics Instructions Baccalaureate education includes the development of professional values and value-based behavior (AACN, 2008). Ethics define professional ethics and their importance in the healthcare environment. The American Nurses Association has approved 13 standardized languages that support nursing care.  The benefits of standardized language include: better communication among nurses

Select one of the following populations: Aging Nursing Assignment Help

Select one of the following populations: Aging Population Homelessness Migrant Workers LGBTQIA+ Other Identified Vulnerable Populations from Your Reading Then complete the following steps for your discussion post: Identify which vulnerable population you have chosen to use for this post and describe what this vulnerable population looks like in your

WGU Population Health Data Analysis Paper Nursing Assignment Help

In this course, you learned that Informatics for Transforming Nursing Care integrates nursing science with multiple information and analytical sciences to identify, define, manage, and communicate data, information, knowledge, and wisdom in nursing practice. This provides knowledge and skills to apply informatics concepts, communications, and data critical to facilitating interprofessional

Professional EthicsInstructions Baccalaureate education Nursing Assignment Help

Professional EthicsInstructions Baccalaureate education includes the development of professional values and value-based behavior (AACN, 2008). Ethics define professional ethics and their importance in the healthcare environment. The American Nurses Association has approved 13 standardized languages that support nursing care.  The benefits of standardized language include: better communication among nurses and

HSA 599 SU Public Health Emergencies Discussion Nursing Assignment Help

I’m working on a health & medical discussion question and need the explanation and answer to help me learn. Discuss a life-threatening event or a natural disaster in your community, such as a severe weather event, terrorist attack, or other type of public health emergency. Examine an overall strategy that

Develop a literature map or a visual representation of the Nursing Assignment Help

Develop a literature map or a visual representation of the Public Health Informatics literature.  Also include a powerpoint presentation explaining the literature map with the slides Constructing a literature map helps you: develop an understanding of the key issues and research findings in the literature organize ideas see how different research studies