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 the resources that will be needed to treat each patient and what the costs will be. Using DRGs as a tool allows the health care organization to develop segments for each patient and give a breakdown of each group of patients. Doing this it allows managers to gain an understanding of what is needed after reviewing each segment, on whether or not a service is still needed or if it should be dropped.
• Calculate the breakeven points, in numbers of treatments, for each type of DRG, using the weighted average contribution margin approach.
1. Break-even points for the three DRGs can be calculated using the following steps: (a) Find the weighted average charge and variable cost:
M45%x$2,000 =$900 45%x$1,000 =$450
J30%x$3,000 =$900 30%x$1,500 =$450
P25%x$1,200 =$300 20%x$300 =$60
Weighted average charge$2,100 Weighted average variable cost$960
(b) The appropriate level of fixed costs is:$3,310,000...