How Does A Break-even Analysis Vary Between Fee-for-service And Capitated Payments?

Varying models of health intendance reimbursement compensation results in corresponding variation of care. For this reason, an understanding of behavioral responses past providers and healthcare organizations to e'er-changing regulatory landscapes is necessary to predict the effect of various revenue structures on healthcare services. It is, thus, prudent to discuss the different reimbursement models and their effects in the post-obit analysis.

Fee-for-service (FFS) methods include: cost-based reimbursement, in which a third-political party payer reimburses allowable costs to the provider; charge-based reimbursement, in which a 3rd-party payer reimburses providers according to a chargemaster rate gear up by the provider; and prospective payment where the payer determines the charge per unit of pay for services prior to the service being rendered (Gapenski, 2012). Phelps (2013) considers FFS every bit the antithesis to managed care organizations in that FFS plans offer the least constraints on providers and consumers resulting in higher costs to the consumer or third party payer. In a fee-for-service environment, total acquirement and profit volition increment as unit volume increases within the relevant range when past the breakeven betoken, thus, the provider is incentivized to increment the unit of measurement volume of services provided in guild to increase revenue and profit. Variations inside the fee-for-service environment also be. Cost-based reimbursement may result in providers offer more than services in lavish facilities every bit payers reimburse providers for all costs. The resulting level of care may get well across that which is medically necessary as providers have very little constraints placed upon services rendered. In charge-based reimbursement models, providers are incentivized to gear up high accuse rates leading to high revenues and are only constrained by competing forces, such as other providers. Nevertheless, increased utilization results in increased revenue, farther encouraged by payments made past insurers rather than patients. Under prospective payment reimbursement, providers are incentivized to perform procedures that produce the highest revenue. Accordingly, providers may select patients whose diagnoses have higher revenue potential. In this regard, prospective payment reimbursement fits inside the fee-for-service model in that providers are incentivized to select procedures or patients that provide the highest reimbursement.   Thus, in a FFS environs, a shift to the right in the demand curve for health care is observable evidence for demand inducement. Physicians that charge a fee for service provide more medical care than physicians that are capitated or salaried (Dranove, 1994).

However, Phelps (2013) observes that limits to inducement necessarily exist or "doctors would own the unabridged world." At that place are three observed reasons why physicians do not induce demand to the maximum. First, physicians may exist satisfied to reach a target level of income that is lower than the maximum, just higher than the income without induced demand. 2d, doctors may experience a level of guilt proportional to the amount induced, thus simply induce demand to a certain threshold beyond which is prevented by guilt. Third, patients suspicious of this activity limit the amount of induced demand (Dranove, 1994). Satterthwaite (1985) alternatively suggests that the positive correlation can be induced as physicians migrate to high price/cost margin communities. Possibly, an increased supply of physicians could lead to reduced look times, also as higher quality through competition that would atomic number 82 to increased consumption. Thus, the prove of demand inducement is established, howbeit with varying causative explanations.

In contrast, a capitation environment occurs when the provider is reimbursed a fixed corporeality over a set menstruation, regardless of the amount of services provided (Gapenski, 2012). Nether capitated reimbursement, the provider is incentivized to maintain volume beneath the breakeven point to reduce or eliminate loss. An important difference in profit analysis between a capitated environment and a fee-for-service environs is that in a fee-for-service surround, total revenue and turn a profit will increase equally unit book increases within the relevant range when past the breakeven point. However, this is reversed in a capitated surroundings because incremental increases in book results in increased costs without an increment in revenue.

Cost-volume-turn a profit (CVP) assay is a technique used to written report the effect of changes in volume on profit allowing managers to examine the effects of alternative assumptions regarding costs, volume, and prices (Greer, 2012). With this analytical technique, profit estimation tin be calculated based on costs (both fixed and variable) and book (number of visits, tests, procedures, etc). Figure 1 displays a CVP graphical model under FFS measuring revenues and costs against number of visits (Ibid). Note that to the correct of the Breakeven Point acquirement increases with each additional unit of service provided; in this case, number of visits.

Construction of a turn a profit and loss (P&L) argument using data derived from CVP analysis can be used to summarize and projection revenues, expenses, and profitability for an organization or department within an organisation.

Nether capitation, the CVP graphical model (Figure 2) illustrates how additional units of service (in this example, number of visits) across the breakeven point result in loss rather than revenue (Greer, 2012) which incentivizes providers to maintain volume below the breakeven point to reduce or eliminate loss.

Having a cost structure that matches revenue structure minimizes the financial risk of a healthcare provider. If a provider utilized fee-for-service reimbursement for all of its patients, each unit of service would incur a variable cost but would also generate a profit, providing the acquirement for each unit of service exceeded the variable cost. A capitated reimbursement state of affairs, in contrast, obtains a profit when stock-still revenues exceed fixed costs regardless of units of service.

            Using CVP analysis allows for decision makers to also determine what price to accuse for services. Commencement with the formula: Full revenues – Total costs = $0, an bookkeeping breakeven toll tin can exist determined for individual services. Consideration of toll setting ability and market share would farther determine what price to charge for each unit of service. Those providers who offer unique services that are not easily attained elsewhere are able to boss large marketplace shares, enabling price-setting privileges. In this situation, full cost pricing strategies are often employed that allows the provider to set a price high enough to cover the total toll of service every bit well equally a profit component. Fee-for-service providers with cost setting status have the power to set prices high plenty to comfortably cover all costs besides as earn a profit. Marginal cost pricing only covers marginal costs and is used to gain or retain market share. Those new or reacting to changes in the market may temporarily use marginal cost pricing. All the same, reliance on marginal toll pricing can just be a temporary measure, otherwise full costs would overcome the resource of the provider.

In contrast, providers who are constrained by a competitive market are price takers and must ready prices co-ordinate to what is acceptable past the market place or will end upward losing clientele to competing providers. Profits, then, are just realized every bit costs are reduced. For price-takers, target costing is a procedure of reducing costs to the indicate where a turn a profit is earned on the marketplace-determined price. If a hospital, as a cost-taker, were offered a specific capitation charge per unit, it would accept to determine what the desired profit would be and then determine what it could do to reduce the variable, and possibly stock-still, costs in order to realize the desired profit inside this capitation charge per unit. There are three approaches that can be taken when developing capitation rates: the fee-for-service approach, the price approach, and the demographic approach. The fee-for-service approach is used to set the inpatient capitation charge per unit and is based on expected utilization and fee-for-service charges to prepare premium rates. The cost-approach sets its premium charge per unit by physicians' price (including support staff and overhead) for the covered population. The demographic-approach focuses on the characteristics of the population being served and uses this stratified information (different historic period groups, different genders, etc.) to determine provider costs (Gapenski, 2012).

References:

Dranove, David & Wehner, Paul (1994). Physician-induced demand for childbirth, Evanston, IL: Periodical of Health Economics

Gapenski, Louis C. (2012). Healthcare Finance: An Introduction to Bookkeeping and Financial Management, 5th Edition, Chicago, IL: Health Administration Printing

Greer, Olen L. (2012). Affiliate v: Price Behavior and Profit Assay (PowerPoint Presentation), Springfield, MO: Foundation of the American College of Healthcare Executives

Phelps, Charles Due east. (2013). Wellness Economics, 5th Edition, Rochester, NY: Pearson

Satterthwaite, Mark A. (1985). Contest and equilibrium as a driving force in the health services sector, New York, NY: Cambridge University Press

How Does A Break-even Analysis Vary Between Fee-for-service And Capitated Payments?,

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