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Cost Concepts Healthcare Organization: Break even point

You are attempting to develop a break-even for a capitation contract with a major HMO. Your hospital has agreed to provide all inpatient hospital services for 10,000 covered lives. You will receive $38 per member per month to cover all inpatient services. It is anticipated that 93 admissions per 1,000 covered lives will be provided with an average length of stay equal to 5.0, or 465 days per 1,000.

Answer the following questions:

- What is the role provided by break-even point and how would you calculate this point?
- Please calculate break-even point in patient days under the provided contract.
- What are the limitations of using break-even point and how would you incorporate this point with management strategic planning?

Solution Preview

Break-even point helps you to see at what level of sales you will cover the fixed costs. After that, each additional sale will generate profit based on how much the sales price exceeds variable costs. Breakeven is usually calculated by fixed costs divided by contribution margin per unit. For instance, how many covered lives do you need to sell or at what price do you need to sell them to cover the costs of running the hospital facility (fixed costs)? That is not the question here.

Here, the question is what ...

Solution Summary

Your response is 320 words and discusses traditional breakeven, breakeven in the context of this contract, how cost per day may change and put the computations at risks and some ideas about how to approach the analysis.