Reference no: EM1317380

Service sector using pricing decision

The managers at Denison have been busy working. They have reviewed past records, considered changes in competition, the general economy, and overall medical trends. Using past charges and anticipated rates of medical inflation, they have also make a first attempt at setting their prices.
Based on a thorough review and discussion of these data, they have projected that next year they will have 240 patients. They expect 120 oncology patients, 80 cardiac patients, and 40 rhinoplasty patients.
 The charge, or list price, for Oncology patients will average $50,000. Cardiac patients will be charged an average of $40,000, and Rhinoplasty, $25,000 per patient. However, those charges often are not the actual amount ultimately received.

The amount the hospital receives depends on whether patients pay their own hospital bills or have health care insurance. Assume that private insurance companies pay the full charge or list price. However, Medicare and Medicaid have announced rates they will pay for the coming year as follows: Oncology patients $40,000, Cardiac patients $30,000, Rhinoplasty $10,000. Self-pay patients are supposed to pay the full charge, but generally 25 percent of self-pay charges become a bad debt. Note that bad debts are treated as an expense in health care. They may not be shown as a reduction lowering revenues. The full charge for self-pay patients is shown as revenue, and then the uncollectible amount is shown as an expense. No payment for charity care is ever received, and charity care is not shown as a revenue or expense.

The payer mix is as follows:

	Private Insurance	Medicare/Medicaid	Self-pay	Charity
Oncology	30%	50%	10%	10%
Cardiac	20%	60%	10%	10%
Rhinoplsty	10%	20%	60%	10%

Gift shop revenue is projected to be $120,000 for the current year and is expected to remain the same. However, this revenue will increase or decline in proportion to changes in patient volume.
Denison Hospital has an endowment of $1,000,000. It is invested as follows:

• $500,000 in 6 percent U.S. Government Bonds that pay interest annually,
• $250,000 in AT&T stock, which pays a dividend of 8 percent annually, and
• $250,000 in growth stocks that pay no dividend.

Prepare a revenue budget on an accrual basis, including all sources of revenue discussed previously. The revenue budget does not have to show all of the detail from requirements 1 and 2, but should show each major source of revenue, such as patient services and endowment.