74 Assume that Valley Forge Hospital has only the following

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 $2,200

Solution

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