What is the cost per operation at 2500 per year? What is the cost per operation at 3000 per year? What is your decision? Does this incremental impact concern only MCO negotiations, or does it have wider implications?

Chapter 8 Problems

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

Costs

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?

Does this incremental impact concern only MCO negotiations, or does it have wider implications?

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.

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

If only 760 DRG 3 operations will take place, should we discontinue DRG 3 from an economic perspective?