Reference no: EM132879333

Part 1- Healthcare providers can lower their financial risk by matching the cost structure to the revenue structure. For example, providers that are primarily reimbursed on a fee-for-service basis can lower risk by converting as many fixed costs as possible to variable costs. Conversely, providers that are primarily reimbursed on a capitated basis can lower risk by converting variable costs to fixed costs.

Assume that you are the business manager of a large cardiology group practice. Virtually all of the practice's revenues are paid on a fee-for-service basis. However, the practice's two largest cost categories (labor and diagnostic equipment) are predominantly fixed. You are concerned about the potential for falling volumes in the future and want to take some actions to reduce the financial risk of the practice.

What cost structure (fixed vs. variable costs) is optimal for the practice? How can labor costs be adjusted to improve the cost structure? How can equipment costs be adjusted? Suppose the change in cost structure will increase overall practice costs at next year's expected volume. Does this fact influence your risk reduction actions?

Part 2- The housekeeping services department of Ruger Clinic, a multispecialty practice, had $100,000 in direct costs in 2020. These costs must be allocated to Ruger's three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5 million in total revenues during 2020, and to support these clinical activities, they used 5,000 hours of housekeeping services.

a. What is the value of the cost pool?

b. What is the allocation rate if: patient services revenue is used as the cost driver? hours of housekeeping services is used as the cost driver?