4

Gapenski, L. Fundamentals of Health Care Finance Chapter 4 (4.1, 4.3, 4.13)

Please provide your insights on the following questions:

1. 1. 1. Explain the difference between fixed and variable costs
      2. What cost structure creates economies of scale? Why?
      3. How does ABC differ from traditional costing?
      4. Respond: Fixed costs are those that do not tend to change over time, such as mortgage or rent, property taxes, electric, Wi-Fi, etc. (Reiter & Song, 2018). These costs are those that the organization must always pay, regardless of their own fluctuating profit, and are independent of volume. While variable costs are those that are interdependent on volume, and depend on the influx of patients. Things like clinical supplies, because if there are more patients that would require more clinical supplies, and vice versa. Economies of scale are created when there is higher volume that ultimately leads to lower per-unit cost (Reiter & Song, 2018). The way I have always thought about economies of scale as simply being like buying things in bulk; a company that is building a new large factory will have a lot of upfront costs, and fixed costs, but this large factory will give them the ability to produce more of their product cheaply. It is the same when you buy things in bulk, the more of a product you buy the amount per ounce or milliliter (or whatever measurement) goes down. ABC or Activity-Based Costing is quite different from traditional costing methods like Cost-to-Charge (CCR) and Relative Value Unity (RVU) because it approaches costing from a completely different perspective. In traditional methods start with the various costs and then trickle down from departments to patient service department and then on to individual services; while ABC actually starts on the other end of this spectrum and works from smaller individual activities up towards the larger conceptual cost such as in a doctor’s visit (Reiter & Song, 2018). In ABC costs are broken down into activities, such as a patient’s assessment, and the annual cost are gathered and then broken down into cost per time per patient visit; once this is done for all activities involved in a particular service, the cost for this service can be deduced. This method is very useful in discovering more specific costs, of which traditional methods are not as useful for.

5

What was your top specific learning takeaway(s) (focusing on one is fine; more are acceptable but not required) from the Module and associated readings this week (describe in a few words)? For your takeaway(s), please explain:

a) the major concept(s) you learned;

b) why were they a meaningful learning for you; and

c) describe your ideas about a potential practical, real-world example or application of the knowledge you gained.

You may include open questions you formulated for future study and development.

Respond: This week we were to read chapter five in our textbooks. This chapter talks about how managers must make decisions on the prices they set for services and look at how their profits are going to look. With the healthcare industry constantly changing I think that it can be difficult to make financial decisions. “Having some knowledge of future profitability requirements, and the prices (and hence revenues) for attaining profitability, it is critical that for good for financial decision making”. (Reiter and Song, 2018, p.120). When I was younger, I always thought that healthcare providers were in complete control of how much they were paid. This chapter shows us that providers sometimes can have zero control over setting prices for their services and then in some cases they have the power to set the price it all depends on the market. I also thought that a big chunk of the payments that patients had to pay for receiving services went to the provider. Now that I am studying to be a healthcare administrator, I am starting to gain a full understanding of how the healthcare system works. “The actions of a single participant – whether a provider or payer – cannot influence the price set in the marketplace” (Reiter and Song, 2018, p.120). I think this is a good thing and can prevent overpricing which is an advantage for those who are paying for the services that are being provided. I am well aware that in order to keep a healthcare organization’s doors open so it can continue to serve he community, there must be a profit. “Profit analysis combines data on costs, volume, and prices to estimate the profitability of organizations, departments, or services” (Reiter and Song, 2018, p.125). Doing a profit analysis gives managers the opportunity to be able to plan for the future in regard to the prices they need to set and decide when or if it is appropriate to offer additional services. After reading this chapter I have realized the importance of being able to budget and plan