Reference no: EM132375891

Part 1 - Fee-for-service (FFS) vs. Managed Care

A health care provider that charges a fee-for-service charges $180 per visit, resulting in the average patient making six visits per year. A competing managed care organization serves the same demographic of patients, charges $120 per visit and the average patient makes five visits per year.

1. Calculate the difference in expenditures per patient between the FFS provider and the MCO (expenditures with FFS provider minus expenditures with MCO).

2. What does this imply about the demand for FFS care vs. the demand for MCO care? (Enter your answer as a 1-3 sentence reply.)

Part 2 - Pricing

Pricing for MRI imaging varies greatly across countries, despite using the same equipment. Prices in the U.S. average over $2500 per MRI, while in India the price can be under $100 per MRI.

1. Calculate the annual fixed capital cost of an MRI machine and building space using the following assumptions:

Total capital cost of MRI machine and space: $1,000,000

Useful life until replacement: 8 years

Opportunity cost of invested capital: 6%

Research the use of Excel's = PMT (rate, nper, pv) function and use it to calculate the annual cost. Report this as your answer.

2. Calculate the average fixed equipment capital cost per MRI using the following assumptions: days per year: 261, and MRIs per day: 22.

Assume that the daily inverse demand function for MRIs in a city with one MRI provider (a hospital) is:

P = 4000 - 100Qd  

Calculate the profit-maximizing price for the following  marginal costs:

3. $100

4. $200

5. $300

Assume that a competing imaging service enters the market and decides to seta price that is $100 above the hospital's marginal cost. Assume that the same demand curve applies. Calculate the potential quantity demanded for the new competitor when the price is set at: (Since some patient mat still use the hospital's MRI, the quantity demanded will reflect the maximum possible for the competitor.)

6. $200

7. $300

8. $400.