HCThe partners of Ortho Inc. are planning for the upcoming fiscal year. For every 1,000 patients you can expect the following rates: 350 Medicare patients, in which the government will reimburse $1,200 per procedure;   50 Medicaid patients, in which the state of Virginia will reimburse $750 per visit;   200 Aetna patients, in which you have a negotiated contract at charges less a 15% discount;   100 Blue Cross patients in which your contract states will pay you charges less a 30% discount;   100 patients from United in which the contract pays the lesser of $1,400 or 75% of charges;M 520   

QUESTION

HCM 520

In-class Assignment

1. The partners of Ortho Inc. are planning for the upcoming fiscal year. For every 1,000 patients you can expect the following rates:

• 350 Medicare patients, in which the government will reimburse $1,200 per procedure;

• 50 Medicaid patients, in which the state of Virginia will reimburse $750 per visit;

• 200 Aetna patients, in which you have a negotiated contract at charges less a 15% discount;

• 100 Blue Cross patients in which your contract states will pay you charges less a 30% discount;

• 100 patients from United in which the contract pays the lesser of $1,400 or 75% of charges;

• 100 private pay patients who will pay 100% of charges;

• 25 Charity patients who you are required to render healthcare to; and

• 75 Self-Pay patients who will pay (on average) of 15% of our total charges.

Charity and Self-Pay patients originated from the Hospital’s Emergency department and were a result of Ortho Inc.’s on-call commitments.

Next year, Ortho Inc.’s costs will be $1,150 per patient.

• Calculate the gross charge necessary to recover Ortho Inc.’s total cost of operations. Be sure to consider United’s “lesser or” clause in their reimbursement rate. Hint: Profit = Total Revenue – Total Cost/ Profit Margin = Total Profit/Total Revenue.

• Calculate the gross charge necessary for Ortho Inc.’s to realize a 15% profit margin on its 1,000 patients.

• United presents a proposal to your group. They have offered to send an additional 100 patients per year to your group at a reduced rate of $1,200 per case.  This rate would only pertain to the incremental patients. The marginal cost for the incremental patients is $900 per case.  The practice needs to maintain its 15% profit margin; can the practice afford to accept this proposal and maintain its profit margin?

• ANSWER

• To calculate the gross charge necessary to recover Ortho Inc.’s total cost of operations, we need to determine the revenue generated from each category of patients and then sum them up.

  1. Medicare Patients:
  – Number of patients: 350
  – Reimbursement per procedure: $1,200
  – Total revenue: 350 * $1,200 = $420,000

  2. Medicaid Patients:
  – Number of patients: 50
  – Reimbursement per visit: $750
  – Total revenue: 50 * $750 = $37,500

  3. Aetna Patients:
  – Number of patients: 200
  – Negotiated discount: 15%
  – Charges per patient: $1,150
  – Total revenue: 200 * ($1,150 – $1,150 * 0.15) = $184,500

  4. Blue Cross Patients:
  – Number of patients: 100
  – Discount: 30%
  – Charges per patient: $1,150
  – Total revenue: 100 * ($1,150 – $1,150 * 0.30) = $80,500

  5. United Patients:
  – Number of patients: 100
  – Reimbursement per patient: Lesser of $1,400 or 75% of charges
  – Charges per patient: $1,150
  – Reimbursement: 100 * min($1,400, $1,150 * 0.75) = $115,000

  6. Private Pay Patients:
  – Number of patients: 100
  – Charges per patient: $1,150
  – Total revenue: 100 * $1,150 = $115,000

  7. Charity Patients:
  – Number of patients: 25
  – Charges per patient: $1,150
  – Total revenue: 25 * $1,150 = $28,750

  8. Self-Pay Patients:
  – Number of patients: 75
  – Average payment: 15% of total charges
  – Charges per patient: $1,150
  – Total revenue: 75 * ($1,150 * 0.15) = $12,938

  Now, let’s calculate the gross charge necessary to recover Ortho Inc.’s total cost of operations:

  Total revenue = $420,000 + $37,500 + $184,500 + $80,500 + $115,000 + $115,000 + $28,750 + $12,938
  Total revenue = $994,188

  Ortho Inc.’s total cost of operations = $1,150 per patient * 1,000 patients
  Total cost = $1,150,000

  To calculate the profit margin, we use the formula:
  Profit Margin = (Total Revenue – Total Cost) / Total Revenue

  Profit Margin = ($994,188 – $1,150,000) / $994,188
  Profit Margin = -$155,812 / $994,188
  Profit Margin = -0.1567 or -15.67%

  To realize a 15% profit margin on 1,000 patients, the total revenue should be 115% of the total cost of operations:

  Total revenue = 1.15 * $1,150,000
  Total revenue = $1,322,500

  To find the gross charge necessary, we need to divide the total revenue by the number of patients:

  Gross charge necessary = $1,322,500 / 1,000 patients
  Gross charge necessary = $1,322.50 per patient

  Now let’s evaluate whether Orth

  o Inc. can accept United’s proposal to send an additional 100 patients per year at a reduced rate of $1,200 per case while maintaining the 15% profit margin.

  Incremental revenue from United’s proposal = 100 * ($1,200 – $900) = $30,000
  Incremental cost from United’s proposal = 100 * $900 = $90,000

  To maintain a 15% profit margin, the incremental revenue should cover the incremental cost, so we have:

  Incremental revenue – Incremental cost = Profit margin * Incremental revenue

  $30,000 – $90,000 = 0.15 * $30,000

  -$60,000 = $4,500

  Since the equation is not true, the practice cannot afford to accept United’s proposal and maintain its 15% profit margin.

  In conclusion, the gross charge necessary to recover Ortho Inc.’s total cost of operations is $994.19 per patient. To realize a 15% profit margin on 1,000 patients, the gross charge necessary is $1,322.50 per patient. Unfortunately, the practice cannot accept United’s proposal and maintain its profit margin due to the negative impact on profitability.