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Flashcards in Exam 2 Deck (50)
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1
Q

Fixed Cost

A

A cost that is not related to the volume of services delivered. For example, facilities costs (within some relevant range)

2
Q

Semi-fixed costs

A

A cost that is fixed at two or more values within the relevant range.
Partially dependent on volume
- If you get outside of a certain range then it can become variable

3
Q

Variable costs

A

Costs that are directly related to volume. For example, the costs of the clinical supplies used by the clinic would be classified as variable costs

4
Q

Total costs are made up of what components?

A

Fixed, semi-fixed, and variable costs

5
Q

What is cost-volume-profit (CVP) analysis?

A

A technique applied to an organization’s cost and revenue structure that analyzes the effect of volume changes on costs and profits

6
Q

Define contribution margin

A

The difference between per-unit revenue and per-unit cost (variable cost rate) and hence the amount that each unit of output contributes to cover fixed costs and ultimately flows to profit

7
Q

Equation for volume breakeven

A

Totalrevenues − Totalvariablecosts – Fixedcosts = Profit

8
Q

What is operating leverage?

A

The proportion of fixed costs in the cost structure.

How much profit will change for each 1% change in volume.

9
Q

Degree of Operating Leverage Formula

A

DOL = Total contribution margin ÷ Profit

10
Q

What elements of profit analysis change when a provider moves from a fee-for-service to a discounted fee-for-service environment?

A

The amount that is paid per patient per visit. This directly effects the amount of revenues that are collected

11
Q

What are the critical differences in profit analysis when conducted in a capitated environment versus a fee-for-service environment?

A

In this environment, you now have to increase the quality of service while trying to decrease the costs per patient. This is very difficult because you can’t sacrifice the quality. In capitated they also take on the insurance function.

12
Q

How do provider incentives differ when the provider moves from a fee-for-service to a capitated environment?

A

Instead of trying to see more patients to increase revenue a capitated environment would push the provider to see less patients to reduce costs. The push would be for preventative care.

13
Q

What cost structure is best when a provider is primarily capitated? Explain.

A

Fixed. This assumes a fixed number of lives covered. The revenue stream is fixed regardless of the volume of services provided. Financial risk is minimized by having a cost structure that matches its revenue structure.

14
Q

What cost structure is best when a provider is reimbursed primarily by fee-for-service?

A

Variable cost structure. If a clinic’s cost structure is based on all variable costs (no fixed) then each visit would incur costs but at the same time create revenues. This cost structure matches the revenue structure which minimizes risk.

15
Q

Direct Cost

A

A cost that is tied exclusively to a subunit, such as the salaries of laboratory employees. When a subunit is eliminated, its direct costs disappear.

16
Q

Indirect Costs

A

A cost that is tied to shared resources rather than to an individual subunit of an organization; for example, facilities costs. These are the overhead costs.

17
Q

What is the goal of cost allocation?

A

Assign all of the costs of an organization to the activities that cause them to be incurred

18
Q

Direct Allocation Method

A

All overhead costs are allocated directly to the patient services departments with no recognition that overhead services are provided to other support departments.

19
Q

Reciprocal Allocation Method

A

A cost allocation method that completely recognizes the overhead services provided by one support department to another.

20
Q

Step-down Allocation Method

A

A cost allocation method that recognizes some of the overhead services provided by one support department to another.

21
Q

What is a cost pool?

A

A group of overhead costs to be allocated; for example, facilities costs

22
Q

What is a cost driver?

A

The basis on which a cost pool is allocated; for example, square footage for facilities costs.

23
Q

Cost Allocation Rate Equation

A

(The Cost Pool) ÷ (The Cost Driver) = Cost Allocation Rate

24
Q

Under what circumstances should an overhead department be divided into multiple cost pools?

A

If a single support department offers several substantially different services, and the patient services departments use those services in different relative amounts, it may be beneficial to separate the costs of that support department into multiple pools.

25
Q

Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?

A
  1. Fairness—that is, does the cost driver chosen result in an allocation that is fair to the patient services departments?
  2. Cost control—that is, does the cost driver chosen create incentives for departments to use less of that overhead service?
26
Q

The cost allocation process

A
  1. Determine the Cost Pool
  2. Determine the Cost Driver
  3. Calculate the Allocation Rate
  4. Determine the Allocation Amount
27
Q

Traditional Costing

A

The top-down approach to costing that first identifies costs at the department level then (potentially) assigns these costs to individual services.

28
Q

Activity Based Costing (ABC)

A

The bottom-up approach to costing that identifies the activities required to provide a particular service, estimates the costs of those activities, and then aggregates those costs.

29
Q

Price Setter

A

Healthcare providers who have market power or whose services can be differentiated from others such as by quality or convenience and hence have the ability to set the prices on some or all of their services.

30
Q

Price Taker

A

Healthcare providers that have to accept more or less the prices set in the marketplace for their services, including the prices set by governmental insurers

31
Q

Can most providers be classified strictly as either a price setter or a price taker?

A

Nope

32
Q

Differences between full cost and marginal cost pricing strategies

A
  • Full cost pricing permits businesses to recover all costs including fixed, variable cost, and to make a profit.
  • Marginal cost pricing recovers only variable costs. In the long run this technique would bankrupt the company. This technique can be used occasionally to attract a new patient clientele or to retain an existing clientele.
33
Q

What is cross-subsidization (price shifting)?

A

This is when some insurers are overcharged for services, as compared to full costs, while others are undercharged.

34
Q

What is target costing?

A

Reducing costs, if necessary, to the point where a profit is earned on the market-determined price.

35
Q

Fee-for-Service Approach for developing capitation rates

A

A technique that uses utilization forecasts and fee-for-service prices to set premium rates.

36
Q

Cost Approach for developing capitation rates

A

A technique that uses utilization forecasts and underlying costs to set premium rates.

37
Q

Demographic Approach for developing capitation rates

A

A technique that uses population demographics and costs to set premium rates.

38
Q

What is scenario analysis as applied to pricing and service decisions?

A

Typically, such analyses include a base case, which uses the most likely estimates for all input values, plus a scenario analysis that considers the effects of alternative assumptions.

39
Q

Define Relative Value Unit (RVU)

A

A measure of the amount of resources required to provide a particular service.

40
Q

Economic Break Even with Profit Equation

A

CM*V = FC + Profit

41
Q

Planning vs. Budgeting

A

Organizational plans focus on the long-term, while budgets deal with the details of that plan in the short term and act as a yardstick by which the organization’s plans and goals are measured.

42
Q

Foundation of Planning Process

A
  1. Value Statement
  2. Mission Statement
  3. Vision Statement
  4. Goals
  5. Objectives
43
Q

Components of Financial Plan

A
  1. Financial condition, investments, and financing
  2. Working capital management
  3. Managerial Accounting
44
Q

Statistics Budget

A

Cornerstone of the budgeting process. It contains the volume and resource assumptions used in the other budgets.

45
Q

Revenue Budget

A

Combines volume data from the statistics budget with reimbursement expectations to forecast revenues.

46
Q

Operating Budget

A

The expense budget combines volume data from the statistics budget with detailed resource utilization data to forecast expenses.

47
Q

Advantages/Disadvantages of Conventional Budgeting

A

Easier to use and takes less time to develop

It could be bad as it could permit overspending

48
Q

Advantages/Disadvantages of Zero-Based Budgeting and When should it be used

A

It adds accountability and causes you to look at every financial aspect
It is bad because it takes a lot of time
You should use this type of budget if you go through a lot of change in the org.

49
Q

Top Down vs. Bottom Up Approach to Budgeting

A

Top - Admin. depicts budget

Bottom - Department heads/employees set budget

50
Q

Variance Analysis

A

Evaluation of differences in Static vs. Actual Budget