Exam 2 Flashcards
Fixed Cost
A cost that is not related to the volume of services delivered. For example, facilities costs (within some relevant range)
Semi-fixed costs
A cost that is fixed at two or more values within the relevant range.
Partially dependent on volume
- If you get outside of a certain range then it can become variable
Variable costs
Costs that are directly related to volume. For example, the costs of the clinical supplies used by the clinic would be classified as variable costs
Total costs are made up of what components?
Fixed, semi-fixed, and variable costs
What is cost-volume-profit (CVP) analysis?
A technique applied to an organization’s cost and revenue structure that analyzes the effect of volume changes on costs and profits
Define contribution margin
The difference between per-unit revenue and per-unit cost (variable cost rate) and hence the amount that each unit of output contributes to cover fixed costs and ultimately flows to profit
Equation for volume breakeven
Totalrevenues − Totalvariablecosts – Fixedcosts = Profit
What is operating leverage?
The proportion of fixed costs in the cost structure.
How much profit will change for each 1% change in volume.
Degree of Operating Leverage Formula
DOL = Total contribution margin ÷ Profit
What elements of profit analysis change when a provider moves from a fee-for-service to a discounted fee-for-service environment?
The amount that is paid per patient per visit. This directly effects the amount of revenues that are collected
What are the critical differences in profit analysis when conducted in a capitated environment versus a fee-for-service environment?
In this environment, you now have to increase the quality of service while trying to decrease the costs per patient. This is very difficult because you can’t sacrifice the quality. In capitated they also take on the insurance function.
How do provider incentives differ when the provider moves from a fee-for-service to a capitated environment?
Instead of trying to see more patients to increase revenue a capitated environment would push the provider to see less patients to reduce costs. The push would be for preventative care.
What cost structure is best when a provider is primarily capitated? Explain.
Fixed. This assumes a fixed number of lives covered. The revenue stream is fixed regardless of the volume of services provided. Financial risk is minimized by having a cost structure that matches its revenue structure.
What cost structure is best when a provider is reimbursed primarily by fee-for-service?
Variable cost structure. If a clinic’s cost structure is based on all variable costs (no fixed) then each visit would incur costs but at the same time create revenues. This cost structure matches the revenue structure which minimizes risk.
Direct Cost
A cost that is tied exclusively to a subunit, such as the salaries of laboratory employees. When a subunit is eliminated, its direct costs disappear.
Indirect Costs
A cost that is tied to shared resources rather than to an individual subunit of an organization; for example, facilities costs. These are the overhead costs.
What is the goal of cost allocation?
Assign all of the costs of an organization to the activities that cause them to be incurred
Direct Allocation Method
All overhead costs are allocated directly to the patient services departments with no recognition that overhead services are provided to other support departments.
Reciprocal Allocation Method
A cost allocation method that completely recognizes the overhead services provided by one support department to another.
Step-down Allocation Method
A cost allocation method that recognizes some of the overhead services provided by one support department to another.
