Break Even Analysis Paper

GETWELL CLINICS BREAKEVEN ANALYSIS
Analyzing Break-Even Points and Dealing with Practice Constraints INSTRUCTIONS: FILL IN THE YELLOW HIGHLIGHTED AREAS • Explain the relevance of Diagnosis Related Groups (DRG) analysis as a tool that drives costs and affects management decisions in health care. Diagnosis Related Groups is a system that categorized patients into specific groups based on their medical diagnosis and other characteristics, such as age and types of surgery, if any. DRGs are currently used by Medicare and some other hospital payers as a basis for payment (Finkler, 2007). What this does is help an organization determine
1. Break-even points for the three DRGs can be calculated using the following steps:
(a) Find the weighted average charge and variable cost: DRG PROPORITION Charge Variable Cost M 45% x $2,000 = $900 45% x $1,000 = $450 J 30% x $3,000 = $900 30% x $1,500 = $450 P 25% x $1,200 = $300 20% x $300 =
(c) Calculate the break even point in total treatments as: break-even point in total treatments as: n point in total treatments as: BE = 850,000 / 1,000 = $800,000 / $1,500 = $100,000 / $900 = 111.11 Total Treatments (d) Distribute the total treatments among the three DRGs as follows: DRG PROPORITION TOTAL TREATMENTS M 45% x 111.11 = 50 J 30% x 111.11 = 33 P 25% x 111.11 = 28 2. DRG Charge Variable Cost Contribution Margin Avg. Length of Procedure (# of hours) Contribution Margin per Hr. M $2,000 $1,000 $1,000 3 hrs $333 J $3,000 $1,500 $1,500 4 hrs $375 P $1,200 $300 $900 1 hrs