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Useful EXCEL Functions

For this class, you might find useful to learn how to use the followingEXCEL functions:

Math and Trig functions:

ABSLOGRANDSUMSUMIFSUMPRODUCTSUMXMY2

Financial functions:

IRRNPVPV

Lookup and Reference

VLOOKUP

Statistical functions:

AVERAGECOUNTCOUNTIFMAXMINSTDEV

Logical functions:

ANDIF

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Break-Even Analysis

• Break even analysis determines the volume of service needed to ensure that revenue generated will exceed costs.

• Applications in health care• Basic Model

– Revenue growths with increasing service volume

– Total cost growths with increasing service volume but at a slower rate than revenue

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Break-Even Analysis

– The break-even point is the level of service volume at which total revenues equal total costs.

– A service volume higher than the break-even point implies that revenues exceed costs.

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Break-Even Analysis

• Basic Linear Model– Total Revenue = Unit-revenue x

Service volume

TR = REV x N

– Total Costs = Fixed Cost + Variable Cost

TC = FC + VC

– Variable Cost = Unit-cost x Service volume

VC = COST x N

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Break-Even Analysis

A

VOLUME of SERVICE (N)

BREAKEVEN POINT

FIXED COSTS (FC)

TOTAL COSTS (TC)

TOTAL REVENUE (TR)

$

Basic Linear Model

• Fixed costs are those that are incurred regardless of how much service is provided.

• Variable costs are items of expense that relate to the direct cost of providing care and are expressed as costs per unit of service delivered.

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Break-Even Analysis

• Solution to the Basic Linear ModelTR = REV x N

TC = FC + VC

VC = COST x N

Want to find N* for which

TR = TC

• N* = FC/(REV - COST)

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Break-Even Analysis

Case Problem - (A) p. 21Jefferson Community Health Plan is a nonprofit, full-service health maintenance organizationoperating in a tri-county region of a mid-western state. Jefferson is considering the developmentof a new satellite health center to serve a growing suburban area in its service region.

Consideration of the new facility has been stimulated by discussions between Jefferson andARGO Industries. ARGO is a growing electronics company with a new plant in the suburban areawhere the health center would be located. ARGO Industries has proposed contracting with theJefferson Community Health Plan to offer comprehensive health services for its employees on anannual capitated payment basis. The capitated HMO plan would be offered as one of two healthinsurance options to ARGO's 2,500 employees.

Financial officers of Jefferson Community Health Plan have estimated the costs associatedwith the new health center as follows:

1. Construction costs (to be amortized over ten years) $1,800,0002. Capital equipment (to be amortized over ten years) $500,0003. Fixed annual operating expenses (utilities, maintenance,

central administration, security, etc.) $370,0004. Variable annual operating costs per 100 enrollees in a

capitated plan (based on financial data from other Jeffersonunits):a. Supplies and materials $15,000b. Clinical staff $76,000c. Support services $18,000d. Contract services (inpatient care) $48,000

In preliminary negotiations, ARGO has proposed contracting with Jefferson at an annualcapitated payment of $1,800 per enrollee in the HMO. ARGO's vice president for humanresources has conducted an employee survey, and she estimates that initial annual enrollmentwould be 1,500 (employees and dependents).

1. Would the proposed new contract with ARGO cover the full costs for the new satellitehealth center?

2. If not, how many additional enrollees from the community would be required for thehealth center to break even financially?

3. To break even on the basis of the ARGO contract, what capitated payment shouldJefferson negotiate?

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Break-Even Analysis

Solution to the Case Problem

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What-If Analysis

Break-Even Analysis

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Break-Even Analysis

Model Variations

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Break-Even Analysis

Model Variations

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Break-Even Analysis

Model Variations

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Break-Even AnalysisSensitivity Analysis with Two-input Data Tables

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Break-Even AnalysisSensitivity Analysis with Two-input Data Tables