HS440 Unit 8 Break-Even Analysis Example

Break-Even Just Beyond the Last Slot: A Unit 8 Break-Even Analysis of a Composite Endoscopy Center

[Student Name]

Purdue University Global

HS440: Finance for Health Care

Unit 8 Break-Even Analysis

[Instructor Name]

[Date]

The center, its payments, costs and options are composite; the finance texts cited are real.

Contribution by Payer

Each payer's contribution is its payment per case minus the 168 dollars of variable cost.

Commercial: 1,180 paid, 1,012 contribution. Medicare: 640 paid, 472 contribution. Medicaid: 380 paid, 212 contribution. Self-pay: 95 collected, minus 73 contribution.

Weighted by last year's mix of 1,960 commercial, 2,270 Medicare, 1,240 Medicaid and 350 self-pay cases, total contribution was 3,292,290 dollars across 5,820 cases, an average of 565.69 per case.

Break-Even Volume

Break-even cases equal fixed costs divided by average contribution per case (Pink & Song, 2020). Fixed costs last year were 3,410,000 dollars. 3,410,000 divided by 565.69 is 6,028 cases.

At twelve cases per room-day, 6,028 cases need 502.3 room-days. The center has 500.

The center cannot break even at last year's mix no matter how well it schedules, because the break-even point sits two and a third room-days past the last slot it owns.

The Same Calculation at the Prior Year's Mix

In the prior year, commercial cases were 2,252, Medicare 2,142, Medicaid 846 and self-pay 300, for an average contribution of 622.29 dollars. At that mix, break-even with the same fixed costs would have been 5,480 cases, about 91 percent of capacity. The rooms did not change; the mix moved break-even out of reach.

Three Ways Back Inside Capacity

Option 1: change the mix of self-pay patients. A financial counselor who helps eligible self-pay patients enroll in Medicaid turns a minus 73 contribution into plus 212. If 200 of last year's 350 self-pay patients had been enrolled, average contribution would have risen by about 9.79 dollars, to 575.48, and break-even would fall to 5,926 cases, inside capacity. The counselor's cost, about 35,000 dollars a year, must be added to fixed costs, which moves break-even back to about 5,986, still inside.

Option 2: add Saturday sessions. Opening one room on 50 Saturdays adds 600 slots and about 105,000 dollars of staffing. New fixed costs of 3,515,000 divided by 565.69 give break-even at 6,214 cases, inside the new capacity of 6,600 but requiring the center to fill 94 percent of all slots.

Option 3: recover commercial volume. Each 100 cases shifted from Medicaid back to commercial raises total contribution by 80,000 dollars, cutting break-even by about 140 cases. This depends on winning back the employer network the center lost, which is outside its direct control.

Limits

Break-even analysis assumes the mix, payments and variable cost stay constant across volume, which is rarely exact. It ignores timing and cash, and it treats fixed costs as truly fixed, though some, like staffing, are step costs. It is a planning tool, not a forecast (Cleverley & Cleverley, 2018), and its results should be read as ranges once uncertainty in mix and payment is considered (Finkler et al., 2019).

Conclusion

At last year's mix the center's break-even lies just beyond its capacity. Enrolling eligible self-pay patients is the cheapest step and alone brings break-even inside the rooms. Saturday sessions add room but demand high fill. Recovering commercial patients would help most but is least certain.

References

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Finkler, S. A., Calabrese, T. D., & Smith, D. L. (2019). Financial management for public, health, and not-for-profit organizations (6th ed.). CQ Press.

Pink, G. H., & Song, P. H. (2020). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.