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Utilization Estimates

See the attached file.
The SLD Imaging Center is currently negotiating with an MCO to provide diagnostic imaging services to 225,000 covered lives. SLD has fixed costs of $750,000 and capacity for an additional 75,000 patient encounters per year. They have two types of services MRI and CT Scans. MRI's have a variable cost of $495 and CT Scan's have a variable cost of $375. The MCO is currently offering $100 per covered life.

SLD has come up with the following utilization estimates:

- 4% of covered lives will need MRIs
- 6% of covered lives will need CT Scans
- Of those needing either service, 27% will require 3 encounters, 56% will require 2 encounters and the remaining 17% will require 1 encounter.

a. Based on SLD's estimates, how much will they be making or losing if they accept the MCO's offer of $100 per covered life?

b. How many total encounters from the covered lives can SLD take on before they start losing money?


Solution Preview

Please see the attached file.

Part A

The revenue from this contract will be: 225,000 * $100 = $22,500,000

The average number of encounters for those needing either service = 0.27 * 3 + 0.56 * 2 + 0.17 * 1 = 2.1

People needing:
MRIs = 4% ...

Solution Summary

This solution looks at potential loses or gains of providing a service with given utilization estimates.