Question

You are attempting to develop a break-even scenario for a capitation contract with a major HMO. Your hospital has agreed to provide all inpatient services for 10,000 covered lives. You will receive $400 per member per month (PMPM) to cover all inpatient services. It is anticipated that 101 admissions per 1000 covered lives will be provided with an average length of stay of 5.0 days, or 505 days per 1000. You anticipate that your hospital will incur fixed costs, or readiness to serve costs, of $ 30,000,000 for these 10,000 covered lives. Variable costs per patient day are expected to be $ 3500. A) Calculate the break-even point in patient days under this contract. B) If the costs, revenues, length of stay and anticipated admissions do not change, does this proposal meet your target of breaking even or better and why?

Answer 1

To calculate the break-even point in patient days under this contract, divide the total fixed costs by the variable cost per patient day. In this case, the break-even point is 8571.43 patient days. This proposal does not meet the target of breaking even because the projected number of patient days is lower than the break-even point.

Step-by-step explanation:

To calculate the break-even point in patient days under this contract, we need to determine the total fixed costs and the variable costs per patient day. The total fixed costs are $30,000,000 for 10,000 covered lives. The variable costs per patient day are $3500.

The break-even point in patient days can be calculated using the formula: Break-even point (patient days) = Total fixed costs / Variable cost per patient day. So, in this case, the break-even point is: 30,000,000 / 3500 = 8571.43 patient days.

If the costs, revenues, length of stay, and anticipated admissions do not change, this proposal does not meet the target of breaking even. The hospital is projected to have 505 days of inpatient services per 1000 covered lives, which means a total of 5050 patient days. However, the break-even point is estimated to be 8571.43 patient days, which is higher than the projected number of patient days. Therefore, the proposal will result in a deficit.