Chapter 8 Problems
1. Average versus incremental costing. Suppose a hospital had the following fixed and variable costs for its operating room (OR):
Variable costs per operation Fixed costs per year
Personnel $150 Depreciation $100,000
Supplies 20 Administration 120,000
Laundry 30 Other 80,000
Other 50
Total $250 Total $300,000
a. Complete the following chart:
Costs
Volume Fixed Variable Total Average
500
1500
2500
3000
b. Suppose a managed care organization (MCO) offers to generate 500 operations a year but offers to pay only $300 per operation. Should we agree to this arrangement? We currently perform 2500 operations per year and have the capacity to easily handle 3000 per year.
(1) What is the cost per operation at 2500 per year?
(2) What is the cost per operation at 3000 per year?
(3) What is your decision?
c. Does this incremental impact concern only MCO negotiations, or does it have wider implications?
7. Break-even analysis. Assume that all payers pay the same prospective rate for surgery patients in DRG 3.
Type of Operation DRG 3
Reimbursement Rate $1,000
Program-Specific Fixed Costs* $150,000
Variable Costs† $800
*Depreciation on equipment plus salary supplement for program supervision.
†Supplies, labor, etc.
a. What is the break-even volume of patients undergoing the surgery for DRG 3?
b. If there are three different types of patients undergoing surgeries, as follows, what would be the break-even point for each DRG?
% of Patients in this DRG Type of Operation Rate of Reimbursement Program-Specific Fixed Costs Variable Costs
25 DRG 1 $500 $50,000 $300
35 DRG 2 2000 100,000 1200
40 DRG 3 1000 150,000 800
Joint 500,000 OR overhead
100 Total fixed costs $800,000
c. If only 760 DRG 3 operations will take place, should we discontinue DRG 3 from an economic perspective?
Chapter 9 Problems
1. Below is a cost-allocation problem. You are given the nonrevenue center bases for allocation and the direct costs for each cost center. Allocate the nonrevenue cost center costs to the revenue centers using step-down allocation. Then allocate them again. The second time, change the order of allocation. Did it change the total direct and indirect costs of each revenue center? By how much? Note that administration costs are allocated based on the direct cost of each cost center, under the good-enough assumption that cost centers with more costs require more administrative supervision. Nursing is allocated based on nursing hours, under the good-enough assumption that a cost center consuming twice as many nursing hours is consuming twice as much nursing costs.
Exhibit 9-1 Allocation Bases
Cost Base Information for Allocation
Nonrevenue Cost Centers Revenue Cost Centers
Administration Nursing Operating Room Per Diem Total Cost
Direct cost $100,000 $300,000 $100,000 $0 $500,000
Allocation Statistics
Administration
Direct costs 75% 25% 0% 100%
Nursing
Nursing hours 10% — 20% 70% 100%
