FMW3HW

Please see attached text and complete the following problems: 4-31 through 4-35. Compile the answers in a Word document.

4-31. Millbridge Memorial Hospital provides comprehensive physical exams. The charge per exam is $100, while the variable cost per exam is $65. Thirty percent of the patients who come in for an exam are private pay. They must pay the full charge. Seventy percent of the patients are covered by an insurance company that has an agreement with the hospital that reduces the charge by 20%. The hospital has $210,000 in fixed costs per year. How many exams must the hospital provide in order to break even? 

4-32. The fixed costs of running a fund-raising dinner for Meals for the Homeless are $10,000 and the variable costs are $75 per attendee. The facility where the event is being held can accommodate 500 people. Answer the following questions about the event:

1. If Meals charged $275 per ticket, how many people would have to attend the gala for the organization to break even on the event? 

2.

2. If Meals charged $300 per ticket, the contribution margin from each ticket sold would be: __________. 

3. If 500 people attend the event, how much does the organization have to charge each attendee to earn a profit of $100,000? (Assume costs from original problem are still in effect.) 

4-33. A Greener World expects to have $15,000 in fixed costs. If its fixed costs do not change but the amount each marcher raises through pledges declines from $55 to $50 and its variable cost/unit increases from $25 to $30, how much will its break even quantity increase? 

4-34. The Helensville Symphony incurs $3,000,000 of fixed costs each year. The variable cost for each person attending one of the orchestra’s performances is $24. If the average charge for a ticket to attend a performance of the Helensville Symphony is $100, how many tickets must it sell each year to break even? 

4-35. Mill bridge Family Services (MFS) currently operates a foster care program that is fully funded by the state. Changing government priorities are expected to result in a 20% reduction in its state foster care funding for the upcoming fiscal year. MFS’s management is considering eliminating the foster care program in the next fiscal year in light of these anticipated funding cuts. The total foster care program expenses for the upcoming fiscal year is $120,000. The foster care program’s budgeted expenses include $25,000 of salaries and occupancy costs that are allocated to its program budget from MFS central administration. These allocated expenses of $25,000 are unavoidable even if the foster care program is eliminated. What is the total relevant cost that should be considered in making this decision? 

Information about accessing the Blackboard Grading Rubric for this assignment is provided below.

References:

Financial Management for Public Health and Not-for-Profit Organizations (4th edition)

Assignment reading attached!

1

3. Compare and contrast the external financing options that are available for healthcare organizations
today.

Reading Assignment

Chapter 4:
Understanding Costs

Unit Lesson

This unit will introduce you to the concept of costs in healthcare. For public service organizations and
healthcare organizations of all kinds, an understanding of costs is absolutely essential. The better that
healthcare managers understand costs, the more accurate their planning will be, and the better they will be
able to control spending for the organization within their areas of responsibility. A solid understanding of costs
will also improve a manager’s ability to make effective decisions on a day-to-day basis for his or her
department. Thus, for many reasons, you need to get a solid understanding of costs. That is what we will
seek to provide in Unit III.

First let us face reality, costs in healthcare are complicated. They are considerably more complicated than
costs in industries such as manufacturing, construction, or retail. One important emphasis of this unit is on
providing a clear understanding of key definitions for widely used cost terms. Such terms include direct costs,
indirect costs, average costs, fixed costs, variable costs, and marginal costs.

In this unit, you will come to realize that finance has its own language, and in order to be effective as a
healthcare manager, you must be able to speak that language. Otherwise you will find yourself in foreign
territory at management team meetings and board of directors meetings. You will also be at great
disadvantage when budget time rolls around each year. Accordingly, in this course, we will teach you the
language of finance so that you can communicate clearly with the chief financial officer (CFO) and other
members of management.

Another focus for Unit III is on understanding how costs change as service volumes change. The relationship
between costs and volume has a dramatic impact on the profits or losses incurred by an organization, and
this relationship is critical to effective decision making. Healthcare organizations must generate black ink on
the income statement in order to survive. That is true for both for-profit and not-for-profit entities, so you must
understand the impact of service volumes on costs.

The old story about the Long Island Tailor comes to mind here. It was said that the tailor lost money on every
single suit that he produced for clients, but he made it up in volume. Well, clearly that will never work. Losing
money on every healthcare service we provide, and then getting busier losing money, will close down the
hospital or clinic in a very short time. In healthcare, we need to find a way to provide services for our patients
at cost levels which allow some margin of revenues over expenses. This may not be true for every patient that
we treat, but it must be true for our patient population overall. Otherwise we could be in a lot of trouble
financially, and in a hurry.

Managers who understand the relationship between costs and service volumes can apply the break-even
analysis technique—a tool that assists in determining the required volume level for a program or service to be
financially self-sufficient. Break-even analysis is crucial for healthcare organizations. There may be many

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UNIT x STUDY GUIDE

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services which we would like to provide for our community, but we need to be realistic about which ones we
can do enough volume in to be profitable.

Let’s look at an example. In a small community, there may be a significant number of patients who need
dialysis services, and it would be great to have a dialysis center in that community to accommodate them.
The patients or patient families may even be coming forward to their doctors or hospital management to
request the service. Dialysis is typically performed three times per week, and having to travel a long distance
for the service three times a week can be a true hardship for patients and families. However, if the service
volume is not sufficient to support a dialysis program in the community, capital expenditures, supplies, and
staffing, then it will fail financially and will wind up providing services for no one. Healthcare organizations
need to conduct thorough break-even analysis before entering into any new service today. You will learn how
to conduct such an analysis in this course.

Unit III concludes with a discussion of cost measurement. To determine the costs of products or services
provided by the organization, it is necessary to allocate costs. Some responsibility center costs are allocated
to other centers, and the costs of specific responsibility center costs are allocated to units of service or
products within that center. Methods of cost allocation, including step-down allocation and activity-based
costing are discussed in this unit. For example, the cost of keeping the hospital clean should be shared
among the various departments of the hospital. The maintenance and biomedical engineering services also
benefits all departments and should be allocated in some manner to the various departments. These
allocations turn out to be a very important consideration, because it can impact the end of year Medicare cost
report and can ultimately impact the hospital’s reimbursement rates.

Conclusion

What makes a hospital, clinic, or other medical service financially successful? One important part of success
for healthcare organizations is found in attracting patients and driving up service volumes and revenues; that
is true. Some of the things that medical facilities do to drive up volumes and revenues include marketing
efforts, community involvement, service expansion, and physician recruitment. This latter aspect is absolutely
crucial. No hospital administrator ever admitted a single patient to his own hospital—physicians do that. No
hospital administrator ever ordered outpatient testing, treatment or rehabilitation—physicians do those things.
Thus, a diverse and adequately-sized physician medical staff is crucial for our success. Hospitals do many
things today to recruit doctors. One example is paying off the doctor’s student loans over a five to ten year
period in exchange for the doctor practicing in the community. Another approach is bridging with the doctor
during residency. This means paying for his or her living expenses and tuition during the final years of
training, in exchange for a commitment to come to the community and practice after graduation. Bridging has
worked for many smaller communities. Doctors drive the boat; never forget that. We must have them to keep
the hospital departments busy and to fill up hospital beds.

However, with so much emphasis on building revenue streams, a smart healthcare manager knows that the
real key to success is holding down costs while driving up revenue. Creating a spread between revenues and
expenses is essential for any healthcare facility. We simply must get black ink on the income statement—
period. The brightest and best intentioned healthcare executive in the world will not be in office long if he or
she is operating with red ink on the income statement month after month. Drive revenue up, keep costs down,
and succeed in your healthcare career.

You will have a better understanding of costs after your studies in this unit.