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A private-garage owner is currently charging his customers $1.75 per hour. But he is considering changing the way he prices parkers in an attempt to increase profit. He has identified two distinct market segments for his business: short-term parkers and all-day parkers with respective demand curves (functions) of QS = 600 - 200PS and QA = 400 - 200PA. Here PS and PA are the hourly rates charged to short-term and all-day parkers, respectively, and QS and QA are the number of cars parked at respective prices. The cost associated with adding extra cars in the garage is negligible (thus, maximizing revenues also maximizes profit).

a. Is the owner maximizing revenue (profit) by charging $1.75 per hour?

b. What price should he charge each group if he wants to maximize revenue (profit). What will be the total revenue collected in each market?

c. Show if total revenue (profit) will indeed increase if different prices (discovered in b) are charged.

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Solution Summary

The total revenue in this case is explored.

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Revenue variance-Budgeting for Oxford Health,

Budgeting Questions A

Oxford Health Grants CEO Bonus (Wall Street Journal)

Oxford Health Plans Inc. (OHP) awarded its chief executive a bonus of $2.5 million in January 2009 for his performance in 2008. He received a $350,000 bonus in January 2008 for his performance in 2007. Oxford, health-plan provider, was on the brink of insolvency when he joined the company. It is back on a solid financial footing.

Shares of Oxford on Thursday closed at $41.79 a share, compared with $17 three years ago, with first-quarter profits expected to hit 74 cents a share, up from 64 cents a share reported during the first quarter of 2007.


Consolidated Balance Sheets Consolidated Statements of Income
December 31, 2008 and 2007 Years Ended December 31, 2008, 2007
(In thousands, except Membership) (In thousands, except Membership)

Assets 2008 2007 Revenues: 2008 2007
Cash 345,530 198,632 Commercial PPOs 3,114,138 2,839,999
Cash equivalents 961,652 868,380 Commercial HMOs 538,958 505,946
Premiums receivable, net 37,127 56,694 Medicare HMO 659,295 677,452
Other receivables 24,678 80,994 Total premium revenues 4,312,391 4,023,397
Other current assets 3,450 4,761 Third-party administration, net 13,791 15,390
Deferred income taxes 83,416 46,102 Investment and other income 95,046 73,015
Total current assets 1,455,853 1,255,563 Total revenues 4,421,228 4,111,802

Property and equipment, net 35,084 19,779 Expenses:
Deferred income taxes 8,348 102,133 Health care services 3,401,331 3,116,544
Restricted investments 58,813 57,194 Marketing and administrative 489,143 476,422
Other noncurrent assets 18,627 9,941 Interest charges 19,003 34,332
Total noncurrent assets 120,872 189,047 Total expenses 3,909,477 3,627,298
Total assets 1,576,725 1,444,610 Operating earnings 511,751 484,504
Income tax expense 189,330 199,085
Liabilities and Net Assets 2008 2007 Net earnings 322,421 285,419
Current liabilities:
Medical costs payable 595,064 612,930
Current portion LT debt 26,250 147,000 Membership
Trade accounts payable 116,601 103,459 Commercial PPOs 1,154,100 1,115,400
Unearned revenue 201,225 88,299 Commercial HMOs 218,200 221,600
Income taxes payable 47,789 0 Medicare HMO 77,800 92,000
Other current liabilities 0 5,700 Total fully insured 1,450,100 1,429,000
Total current liabilities 986,929 957,388 Third-party administration 60,000 62,400
Long-term debt 126,876 28,000 Total membership 1,510,100 1,491,400
Total Liabilities 1,113,805 985,388

Net Assets
Total shareholders' equity 462,920 459,222
Total liabilities, net assets 1,576,725 1,444,610

Question 1: For revenues, the 2008 budget was given as the year 2007 results - no change was expected from one year to the next. However, one manager anticipated substantial decreases in Medicare prices (per member per year for 2007) and therefore made unauthorized efforts to curb Medicare enrollent.

A. What are the sources of Medicare Revenue variances?

B. Should this manager be rewarded based upon financial results (ignore the managerial issues of making unauthorized efforts)?

UnitedHealth First-Quarter Net Rose 37% as Medical Claims Eased
UnitedHealth Group Inc. posted a 37% increase in first-quarter net income and raised its full-year earnings forecast, as insurance premiums kept ahead of slowing increases in medical costs.
Shares in the Minneapolis-based insurer, however, fell 4.4% or $2.95 to $63.95 in New York Stock Exchange 4 p.m. composite trading.
Investors were concerned that the company gained fewer than expected new members in its health plans. The slowdown in growth suggests that competition for new health-plan members is intensifying and that major carriers such as UnitedHealth are being undercut by smaller rivals willing to risk profit to gain business.
A moderation in health-care cost increases have led to double-digit profit increases for insurers over the past several quarters. Higher deductibles, higher co-payments for prescription drugs, and broader availability of nonprescription drugs (which are paid for out-of-pocket) have helped rein in health-care costs for insurers. UnitedHealth said it paid $90 million less in claims in the first quarter than it had anticipated.
UnitedHealth's net income rose to $554 million, up from $403 million,. Revenue rose 17% to $8.14 billion. The company said it now expects full-year earnings of $3.75 to $3.78 a share, an increase of 26% to 28%. Earlier, the company had forecast an increase of 25% to 26%.
UnitedHealth's membership grew by 1.5 million people in the quarter to 20.2 million people. Analysts say the increase in members was about 200,000 short of what some analysts expected.
On a conference call with investors, UnitedHealth's chief executive said the company wouldn't underwrite new business at prices it couldn't profitably sustain. Indeed, the company said it has lost bids for several large accounts recently to rivals who priced premiums more aggressively.

UnitedHealth Group
Consolidated Statements of Operations (in millions)

3 Months ending March 31,
2008 2007
Premiums 7,264 6,148
Services 789 770
Investment and Other Income 91 57
Total Revenues 8,144 6,975

Medical Costs 5,869 5,050
Operating Costs 1,317 1,199
Depreciation and Amortization 82 73
Total Medical and Operating Costs 7,268 6,322

Interest Expense -24 -23
Provision for Income Taxes -298 -227

Segment Financial Informaton
(in millions) 3 Months ending March 31,
2008 2007
Earnings - United Healthcare 577 402
Earnings - Uniprise 167 152
Earnings - Specialized 113 88
Earnings - Ingenix 19 11
Total Segment Operating Earnings 876 653

UnitedHealth Group
Consolidated Balance Sheets (in millions)

As of March 31,
2008 2007
Cash and Cash Equivalents 2,930 2,748
Net Accounts Receivable 873 745
Other Current Assets 2641 2627
Total Current Assets 6,444 6,120

Long-Term Investments 7,249 6,729
Net Other Assets 7159 4785
Total Assets 20,852 17,634

Medical Costs Payable 4,664 4,152
Current Portion of Long-Term Debt 150 229
Other Current Liabilities 4325 4387
Total Current Liabilities 9,139 8,768

Long-Term Debt, less current maturities 2,250 1750
Future Policy Benefits for Life and Annuity Contracts 1,614 1517
Deferred Income Taxes and Other Liabilities 622 471
Total Long Term and Other Liabilities 4,486 3,738

Total Shareholder's Equity (Net Assets) 7,227 5,128
Total Liabilities and Shareholder's Equity 20,852 17,634

Question 2: The Medical Director is really happy with the Medical Cost performance. As stated in the paper, this is some 90 million less than anticipated. Note that enrollment was 200,000 less than anticipated.

a. Of the total medical cost savings of actual versus analysts' budget expectations in 2008, how much is due to lower enrollment versus lower medical costs per member?

b. UnitedHealth Group has been working hard on controlling medical costs. Based on the information in the article and financial statements, do you think that they were successful in controlling costs per member between 2007 and 2008? What other information would you like to see?

Almost Family, Inc. (AFAM)

Almost Family, Inc. provides alternatives for seniors and other adults with special needs who wish to avoid nursing home placement as long as possible, through its network of adult day care centers and ancillary services. On January 1, 2008, the Company changed its name to Almost Family, Inc. from Caretenders HealthCorp.


Current assets: Current liabilities:
Cash and cash equivalents $2,160 $461 Accounts payable $6,724 $3,472
Net accounts receivable $6,850 $7,263 Other current liabilities $0 $164
Other current assets $1,103 $2,068 Total current liabilities $6,724 $3,636
Total current assets $10,113 $9,792
Long-term debt $1,217 $3,415
Property and equipment $13,645 $11,219 TOTAL LIABILITIES $7,941 $7,051
Less accumulated depreciation $3,149 $2,589
Net property and equipment $10,496 $8,630 TOTAL EQUITY $12,668 $11,371
TOTAL ASSETS $20,609 $18,422 TOTAL LIABILITIES & EQUITY $20,609 $18,422

REVENUES 2008 2007 EXPENSES 2008 2007
Net operating revenues $12,621 $11,885 Operating expenses:
Salaries and benefits $10,444 $9,974
Supplies $906 $966
Depreciation $270 $245
Interest expense $160 $295
Total Operating Expenses $11,780 $11,480
Operating income $841 $405

Taxes on income $404 $170
Net income $437 $235

Question 3: Almost Family wants to understand whether changing its name has improved the market perception of the company. With no change in other marketing efforts, they think that they have increased their customer base (days of care). In addition, their relations with insurers have improved to increase net operating revenues from $80.75 per day in 2007 to $81.43 per day in 2008.

a. What are the sources of the variance of net operating revenues for 2008 as compared to 2007?

b. The Chief Financial Officer says that the increase in revenues was his doing, as she was the one that initiated negotiations and relations to improve net payments per day. On the other hand, the Director of Marketing, whose idea it was to change the name of the company says that her actions led to the increase in the number of days of care. Which executive deserves the higher bonus for 2008?

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