Profit Analysis in Healthcare

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define profit analysis and discuss how patient volume impacts profitability. You'll also learn the difference between Fee-For-Service and Capitation Reimbursement.

What Is Profit Analysis?

Cregg, the Chief Financial Officer of Synergy Hospital Corporation, is training a new group of financial analysts. He starts by explaining that the company's profitability differs from most industries because their financial health depends on their clients' unhealthiness. As a result, the healthcare organization's profit analysis, the extent to where revenues equal or exceed expenses, may be a little more difficult to gauge. Today we'll explore profit analysis as it relates to volume changes, and compare and contrast fee-for-service and capitation reimbursement.

Volume Changes on Profitability

Cregg shares that one of the main challenges healthcare organizations face financially is how to ward against fluctuations in patient volume. He asks the participants to discuss the difference between fixed and variable expenses in regards to volume, and then provide examples. One participant shares that fixed expenses are costs that do not change with volume. He gives the following examples: building loans, salaries, and utilities. Another financial analyst defines variable costs as dynamic and ever-changing based on volume. Examples include supplies, tests, and medications. Cregg agrees and then explains that financial challenges occur when patient volume decreases, variable costs do not decrease at the same rate, and fixed costs remain the same.

For example, let's say that a rural hospital's net income revenues with 1,500 patients reach $1,000,000 and fixed and variable costs are $500,000 and $300,000 respectively. Net profit equals $200,000. However, when patient volume decreases to 1,000 patients, revenues decrease to $700,000, fixed costs remain the same at $500,000 and variable costs equal $200,000, the hospital breaks even. Cregg explains that while the hospital did not lose money, breaking even is an uncomfortable position. He offers the following suggestions to minimize the impact:

  • Schedule staffing based on historical patient admittance data, consider flexible staffing options by hiring and scheduling part-time or hourly workers during peak times and reducing their hours when patient volume decreases.
  • Renegotiate supplier contracts, analyze the costs of supplies, tests and medications during slower periods and negotiate contracts with suppliers at the breakeven point or higher.
  • Partner with physicians to increase volume, attracting thriving physicians can increase volume and profitability. Ensure new physicians serve a sufficient number of patients and share cost-saving methodologies.
  • Outsource non-essential services, including food and nutrition, laundry and technological assistance. Companies who specialize in these services can offer significant savings.

Afterwards, Cregg polls the participants for additional comments or questions and someone asks Cregg to discuss the difference between fee-for-service and capitation reimbursement.

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