Case study:Financing of standard treatment protocol of a product line

Please help with these questions, I am so novice to finance: Your Firm has an established debt policy of 60 percent for all capital expenditures. What targeted valuefor the replacement viability ratio must be set? Your hospital has billed charges of $4,000,000 in February. If your Collection experience indicates that 20 percent is paid in the month billed, 40 percent in the second month, 20 percent in the third month, and 5 percent in the fourth month, determine the following value: (a)Net patient revenue for February (b) Collections of February charges in February (c) Net accounts receivable at the end of March for February billings Omega Health Foundation is considering buying personal computers to install in each patient’s room. The cost of the investment will be $1,400,000. It is expected that the technology will reduce nursing cost by $200,000 per year for the next seven years. If your discount rate is 10 percent, what is the profitability index of the investment? You are reviewing your targets for short-term cash reserves next year. You wish to carry at least twenty days of cash on hand. If annual budgeted cash expenses are $48Milion, what amount of short term reserves should be targeted? Calculate the contribution margin per case based on the following information: (a) Variable cost per case $2,000. (b) Fixed cost per period $200,000. (c) Price per case $4,800. Dr. Mallory practices at your hospital and your competitor. Presented below are data for DRG 209 (major joint and limb reattachments,(lower extremity) that reflects practice patterns for Dr. Mallory at the two hospitals: Your Hospital Competitor _______________________________________ Discharges 150 90 Average age 68 50 Length of stay 4.4 4.1 Average cost $10,550 $7,108 Nursing cost 1,998 1,208 Ancillary cost 8,552 5,900 Operating room cost 2,405 2,158 Lab cost 836 484 Radiology cost 277 191 Medical Supplies cost 3,022 1,690 Pharmacy cost 857 335 Other costs 1,156 1,042 What do you think accounts for the difference in costs between the two hospitals? Omega System Services, a member of the Omega Health Foundation operates a free-standing ambulatory care center that averages $60 in charges per patient. Variable costs are approximately $10 per patient, and fixed costs are about $1.2 million per year. Using this data, how many patients must be seen each day, assuming a 365-day operation, to reach the break- even point? Your hospital has been approached by a major health maintenance organization (HMO) to perform all their diagnosis related group (DRG) 209 cases (major joint reattachment procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for DRG 209 during last year and found the following profile: Average charge: $15,000 Average LOS: 12 days Routine Charge 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 In the above data set, assume that the hospital’s cost-to-charge ratio is 0.80for routine services and 0.75 for all other ancillary services. Using this information, what would be the average cost of DRG 209 be? Estimate the variable cost per DRG 209 using the department cost/charge ratio and variable cost percentages. The HMO in the above example has indicated that their doctors use less expensive joint implants. If this less expensive implant is used, your medical supply charges would be reduced by $2,000. What is the estimated reduction in variable cost? You have been asked by management to explain the variances in cost under your inpatient capitated contract. The following data is provided: Budget Actual Inpatient costs $12,568,500 $16,618,350 Members 42,000 42,000 Admission rate 0.070 0.095 Case mix index 0.90 0.85 Cost per case (CMI= 1.0) $4,750 $4,900 What dollar amount of the total variance is attributed to enrollment variance? (a) $299,250 (b) 0 (c) None of the above What dollar effect did the increased admission rate have on cost? The intensity of care delivered dropped from a budgeted case rate of 0.90 to an actual case mix of 0.85. What dollar effect did this have on costs? • Geisinger Health Plan has asked your hospital to provide all of its obstetric services. It has offered to pay your hospital $2,000 for a normal vaginal delivery (DRG 373), without complications. You have reviewed the standard treatment protocol for this product line and discovered that your hospitals cost is $2,400. What should you do?

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