Break Even Analysis Paper

GETWELL CLINICS BREAKEVEN ANALYSIS
Analyzing Break-Even Points and Dealing with Practice Constraints INSTRUCTIONS: FILL IN THE YELLOW HIGHLIGHTED AREAS • Explain the relevance of Diagnosis Related Groups (DRG) analysis as a tool that drives costs and affects management decisions in health care. Diagnosis Related Groups is a system that categorized patients into specific groups based on their medical diagnosis and other characteristics, such as age and types of surgery, if any. DRGs are currently used by Medicare and some other hospital payers as a basis for payment (Finkler, 2007). What this does is help an organization determine
the resources that will be needed to treat each patient and what the costs will be. Using DRGs as a tool allows the health care organization to develop segments for each patient and give a breakdown of each group of patients. Doing this it allows managers to gain an understanding of what is needed after reviewing each segment, on whether or not a service is still needed or if it should be dropped.

• Calculate the breakeven points, in numbers of treatments, for each type of DRG, using the weighted average contribution margin approach.
1. Break-even points for the three DRGs can be calculated using the following steps:
(a) Find the weighted average charge and variable cost: DRG PROPORITION Charge Variable Cost M 45% x $2,000 = $900 45% x $1,000 = $450 J 30% x $3,000 = $900 30% x $1,500 = $450 P 25% x $1,200 = $300 20% x $300 =
$60 Weighted average charge $2,100 Weighted average variable cost $960

(b) The appropriate level of fixed costs is: $3,310,000 (b) This is appropriate level of fixed costs because:
This is the appropriate level of fixed costs because if one added the total fixed costs of M,J,&P together and then added the Joint Fixed Cost to that, they would get $3,310,000.
(c) Calculate the break even point in total treatments as: break-even point in total treatments as: n point in total treatments as: BE = 850,000 / 1,000 = $800,000 / $1,500 = $100,000 / $900 = 111.11 Total Treatments (d) Distribute the total treatments among the three DRGs as follows: DRG PROPORITION TOTAL TREATMENTS M 45% x 111.11 = 50 J 30% x 111.11 = 33 P 25% x 111.11 = 28 2. DRG Charge Variable Cost Contribution Margin Avg. Length of Procedure (# of hours) Contribution Margin per Hr. M $2,000 $1,000 $1,000 3 hrs $333 J $3,000 $1,500 $1,500 4 hrs $375 P $1,200 $300 $900 1 hrs
$900 • Propose recommendations that answer the following questions: o Which DRG must be promoted in an advertising program if the office has excess capacity? Explain why.
After examining the calculations above, the DRG that must be promoted in an advertising program if an office has excess capacity would be DRG J. This is the case because it has the highest contribution margin of $1500, and the organization is not losing money in any way because it has excess capacity. The DRG with the highest contribution must be promoted to maximize Getwell's profits.

o Which DRG must be promoted if the office is almost at maximum capacity in terms of available hours? Explain why.
If the organization is lost to maximum capacity when the hours are concerned they would need to promote DRG P. DRG P must be promoted because in terms of contribution margin per hour, DRG P has the highest CM per hour and must be promoted to achieve maximum profitability.

o What rationale may be used to support the use of DRGs as an approach to allocating costs?
Fixed costs remain the same, and this means the more the contribution yields, the organization will realize they are gaining more profits. Therefore, this is the rationale that could be used to support the use of DRGs as an approach to allocating costs.

Finkler, S. A., Ward, D. M., & Baker, J. J. (2007). Essentials of cost accounting for health care organizations (3rd ed.). Sudbury, MA: Jones and Bartlett.