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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?
Expert Answer
Solution:
A.
Break-even volume in units=fixed cost/(price-variable cost)
Fixed revenue = 10,000 patients × $400 a day × 12months = $48,000,000
Break-even volume= ($48,000,000 – $30,000,000)/$3500
Break-even volume = 5,142.86 ~ 5,143
B. If the costs, revenues, length of stay and anticipated admissions remains the same, the proposal will not meet the target of breaking even because with time the covered lives will increased and hence will increase the fixed costs.
