Reference no: EM13379008

Your hospital has been approached by a major HMO to perform all their DRG 209 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for DRG 209 during the last year and found the following profile:

Average Charge      $15,000

Average LOS     5 Days

 Cost/Charge Variable Cost %

Routine Charge      $3,600       0.80     60

 

Operating Room  2,657       0.80     80

Anesthesiology  293       0.80     80

Lab        1,035       0.70     30

Radiology      345       0.75     50

Medical Supplies 4,524       0.50     90

Pharmacy   1,230       0.50     90

Other Ancillary     1,316       0.80     60

Total Ancillary     $11,400       0.75     50

1. In the above data set, assume that the hospital's cost to charge ratio is 0.80 for routine services and 0.75 for all other ancillary services. Using this information, what would the average cost of DRG 209 be?

2. Estimate the variable cost per DRG 209 using the departmental cost/charge ratios and variable cost percentages.

You have been asked to establish a pricing structure for radiology on a per-procedure basis. Present budgetary data is presented below:

Budgeted Procedures     10,000

Budgeted Cost      $300,000

Desired Profit       $100,000

It is estimated that Medicare patients comprise 40 percent of total radiology volume and will pay on average $38.00 per procedure. Approximately 10 percent of the patients are cost payers. The remaining charge payers are summarized below:

Payer    Volume % Discount %

Blue Cross     10       4

Unity PPO      25     10

Kaiser       10     10

Self Pay      5     40

  50%

3. What rate must be set to generate the required $100,000 in profit in the preceding example?

4. If the forecasted volume increased to 12,000 procedures and budgeted costs increased to $340,000, while all other variables remained constant, what price should be established?

5. Palmer Home Health Agency expects to contract with an integrated delivery system for an estimated 36,000 members. The IDS expects 12% of its members to use the home health service in any given month. The budgeted rate per visit is $30. At the end of the first year of the contract the CEO of the Palmer's reviewed the activity on the contract and determined the following: the actual number of members was 10% higher than budgeted and the actual monthly revenue was $118,800. What are the volume variance and rate variance experienced, and are these variances favorable or unfavorable?

A.  volume variance = $23,760 unfavorable; rate variance = $12,960-favorable

B.  volume variance = $10,800 favorable; rate variance = $21,600 unfavorable

C.  volume variance = $12,960 favorable; rate variance = $23,760 unfavorable

D.  volume variance = $21,600 unfavorable; rate variance = $10,800 favorable

E.   none of the above

6. Using the information in the table below, calculate the amount of the unfavorable rate variance.

	Budgeted	Actual
Volume	200,000	190,000
Revenue per unit	$40	$37
Revenue	$8,000,000	$7,030,000

A.  $400,000

B.  $570,000

C.  $970,000

D.  $600,000

E.   can not calculate with given information

7.   Using the information in the table below, determine how much of the supplies variance is due to a change in volume.

	Budgeted	Actual	Variance
Volume	1,000	1,100	100
Supplies	$10,000	$12,750	$2,750
Fixed labor	$20,000	$22,250	$2,250
			$5,000

A.  $  900

B.  $1,000

C.  $1,050

D.  $1,250

E.   $1,500

8.  If $1,000 is the present value of $1,250 to be received at the end of two years, what is the one-year discount factor (to the closest hundredth of a percentage point)?

A.  0.89

B.   1.25

C.   0.80

D.  None of the above

9.  What is the effective annual rate of a 12% interest rate per year, compounded monthly?

A.  11.27%

B.   12.00%

C.   12.36%

D.  12.54%

E.   12.68%

10. What is the present value of a $2000 per year annuity at a discount rate of 15% for 15 years?

A.  $8,137

B.   $11,695

C.   $17,028

D.  None of the above

11. Columbus Clinic expects to receive $10,000 five years from now. If the clinic's cost of capital is 12% per year, what is the value of the $10,000 three years from now (to the nearest dollar)?

A.  $14,049

B.   $7,972

C.   $5,917

D.  None of the above

12.  Two investment projects which are mutually exclusive both require a $10,000,000 investment. Projected cash flows are:

Year  Project A      Project B

1  $3,500,000   $6,500,000

   2     3,500,000     3,000,000

   3     3,500,000     3,000,000

   4     3,500,000     1,000,000

If your discount rate is 12 percent, calculate payback and the net present value.

13.  You are considering two ways of financing a new hospital acquisition. You could arrange with a private investor group to buy the present facility for $50 million and lease it to you for $5.75 million per year over the next 15 years. You could then buy the facility for fair market value, which is assumed to be $80 million at the end of the 15th year.

Alternately, you could arrange for an 80 percent tax exempt bond with an effective interest rate of 8 percent. The bonds would be level debt service over 20 years. The remaining 20 percent could be provided from a taxable issue with a 10-year maturity. The effective interest rate would be 14 percent and the bonds would be level debt service.

Which of the two financing plans is the least expensive (i.e., has the lowest net present value if your cost of capital is 12 percent)?  Ignore reimbursement and tax considerations

14. St. Luke's Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?

15. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts for early payment. What is the formula to determine the effective interest rate if the discount is not utilized?

16. Your hospital has billed charges of $5,000,000 in February. If your collection experience indicates that 30 percent is paid in the month billed, 40 percent in the second month, 15 percent in the third month, and 10 percent in the fourth month, determine the following values:

a) Collections of February revenue in February, March, April and May.

b) Net accounts receivable at the end of March for February billings.

17. You are reviewing your targets for short-term cash reserves next year. You wish to carry at least twenty five days cash on hand. If annual budgeted cash expenses are $62,000,000, what amount of short-term cash reserves should be targeted?