HSA 525 Assignment 2 Cost Behaviors and Allocation

1. WHAT IS THE VALUE OF THE COST POOL?

100,000

2. WHAT IS THE ALLOCATION RATE IF:

A. Patient services revenue is used as the cost driver?

100,000/5,000,000=$0.02 per patient service revenue

B. HOURS OF HOUSKEEPING SERVICES IS USED AS THE COST DRIVER?

$100,000/5000=$20 per housekeeping hr.

3. WHAT IS THE COST-VOLUME-PROFIT (CVP) ANALYSIS AND WHY IS IT USEFUL TO HEALTH SERVICES MANAGERS?

The profit analysis is an analytical technique used to analyze the effect of volume changes on profit. The same procedures can be used to assess the effects of volume changes on cost, so this type of analysis is often called cost-volume-profit(CVP) analysis. Cost-volume profit analysis is a simple but flexible tool for exploring potential profit based on cost strategies and pricing decision while it may not provide detail analysis. Even entities without a profit goal find CVP useful. Government agencies use the analysis to determine the level of service appropriate for projected revenues. Non-profit agencies increasingly stipulating fees for service can explore-fee pricing options; in many cases, the recipients are especially price-sensitive due to income or health concerns (LOUIS C. GAPENSKI, HEALTHCARE FINANCE, FOURTH EDITION, 2008, PP134-135)

CVP analysis allows managers to examine the effects of alternative assumptions regarding costs, volume, and prices. Clearly such information is useful as managers evaluate future courses of action regarding pricing and the introduction of new services(LOUIS C. GAPENSKI, HEALTHCARE FINANCE, FOURTH EDITION,2008, PP134-135).

Managers need to estimate future revenues, costs, and profits to help them plan and monitor operations. They use cost-volume-profit (CVP) analysis to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, and monitor organizational performance. Managers also analyze operational risk as they choose an appropriate cost structure (L.BRANNON AND A. MCCABE,”TIME RESTRICTED SALES APPEAL AUGUST/SEPTEMBER 2001, PP 47-53).

4.COMPARE AND CONTRAST THE FOLLOWING THREE METHODS OF DEVELOPING CAPITATION RATES: FEE-FOR-SERVICE APPROACH; COST APPROACH; AND DEMOGRAPHIC APPROACH.

Capitation is a fixed sum per person paid in advance of the coverage period to a healthcare entity in consideration of its providing or arranging to provide, contracted healthcare services to the eligible person for the specified period.

The fee-for-service approach is often used to set the within-system in-patient capitation rate. This method is based on expected utilization and fee-for-service charges rather than underlying costs, although there clearly should be a link between charges and cost. Fee-for-service is a technique that uses utilization forecasts and fee-for-service prices to set premium rates (LOUIS C. GAPENSKI, HEALTHCARE FINANCE, FOURTH EDITION, 2008,PP 44-46).

Fee-for-service methods, doctors, hospital could order as many test as they felt necessary for example doctors and hospital maded a lot of money under this system because they decided the prices charged every visit.

Cost approach is a technique that uses utilization forecasts and underlying costs to set premium rates. Therefore hospital and doctors didn’t make as much money because of set rates.

Demographic approach is a technique that uses population demographics and costs to act premium rates; son therefore depending on your location determines the money you make.

5.WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF CONVENTIONAL BUDGETING VERSES ZERO-BASED BUDGETING?

Conventional budgeting prepare their budgets based on the previous year’s budget. Their department justify only the increases in the expenses required for the current year; they need not have to justify the expenses/budget already approved in the previous year; also the previous year’s expense will have to be made in any case to maintain the regular business level.

Advantages of zero base budgeting is :It question the current budgets expense levels, the effectiveness and efficiency of current processes

Thus, overall cost management control is built in

It focuses on corporate or organizational objectives and within them, the departmental objectives. Thus budget supports their achievements; it supports the overall business very effectively. It drives the department’s plan and so, the planning process starts right away with the formulation of the budgets right at the beginning of the year.

Ultimately focuses on value for money(VFM)

It is based on current market and business realities and therefore, more realistic

Disadvantage of Zero Based Budgeting

1 .More time and effort are required in zero based budgeting as compared to the incremental or conventional budgeting

2. Questioning the current ways of doing business may be threatening to some people within the organization

3. Deciding the departmental objectives within the frame work of organization objectives necessitates top down communication of these objectives with lots of clarity. (Shyam Bhatawdekar’s; website: http://shyam.bhatawdekar.com)

REFERENCES:

LOUIS C. GAPENSKI, HEALTHCARE FINANCE, FOURTH EDITION,2008L.BRANNON AND A. MCCABE,”TIME RESTRICTED SALES APPEAL, AUGUST/SEPTEMBER 2001

SHYAM BHATAWDEKAR-http://shyam.bhatawdekar.com