4 HS440 Finance for HealthcareUnit 7Assignment Numeric Problems (10 @ 5 = 50) Use the following information for problems 1, 2, and 3. David Jones, the new administrator for a surgical clinic, was trying to determine how to allocate his indirect expenses. His staff was complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities based on square footage of each department, administration based on direct costs, and laboratory based on tests. Use the information in the chart below to answer problems 22, 23 and 24. Square Footage Direct Expenses Lab Tests Utilities $200,000 Administration 2,000 500,000 Laboratory 2,000 625,000 Day-op Suite 3,000 1,400,000 4,000 Cystoscopy 1,500 300,000 500 Endoscopy 1,500 600,000 500 Total 10,000 $ 3,375,000 5,000 1. What are the Day Op Suite’s total expenses? 2. What are the Cystoscopy Department’s total expenses? 3. What are the Endoscopy Department’s total expenses? Use the following information for questions 4, 5, and 6. Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the following profile: Average Charge $15,000 Average LOS 5 Days Cost/Charge Variable Cost % Routine Charge $3,600 0.80 60 Operating Room 2,657 0.80 80 Anesthesiology 293 0.80 80 Lab 1,035 0.70 30 Radiology 345 0.75 50 Medical Supplies 4,524 0.50 90 Pharmacy 1,230 0.50 90 Other Ancillary 1,316 0.80 60 Total Ancillary $11,400 0.75 50 4. In the above data set, assume that the hospital’s cost to charge ratio is 0.80 for routine services and 0.75 for all other ancillary services. Using this information, what would the average cost of MS-DRG 470 be? 5. Estimate the variable cost per MS-DRG 470 using the departmental cost/charge ratios and variable cost percentages. 6. The HMO in the above example has indicated that their doctors use less expensive joint implants. If this less expensive implant is used, your medical supply charges would be reduced by $2,000. What is the estimated reduction in variable cost? Use the following information for problems 7, 8, and 9. You have been asked to establish a pricing structure for radiology on a per-procedure basis. Present budgetary data is presented below: Budgeted Procedures 10,000 Budgeted Cost $400,000 Desired Profit $80,000 It is estimated that Medicare patients comprise 40 percent of total radiology volume and will pay on average $38.00 per procedure. Approximately 10 percent of the patients are cost payers. The remaining charge payers are summarized below: Payer Volume % Discount % Blue Cross 20 4 Unity PPO 15 10 Kaiser 10 10 Self Pay 5 40 50% 7. What rate must be set to generate the required $80,000 in profit in the preceding example? 8. If the forecasted volume increased .

1. 4
HS440 Finance for HealthcareUnit 7Assignment Numeric
Problems (10 @ 5 = 50)
Use the following information for problems 1, 2, and 3.
David Jones, the new administrator for a surgical clinic, was
trying to determine how to allocate his indirect expenses. His
staff was complaining that the current method of taking a
percentage of revenues was unfair. He decided to try to allocate
utilities based on square footage of each department,
administration based on direct costs, and laboratory based on
tests. Use the information in the chart below to answer problems
22, 23 and 24.
Square Footage
Direct
Expenses
Lab Tests
Utilities
$200,000
Administration
2,000
500,000
Laboratory
2,000
625,000
Day-op Suite
3,000

2. 1,400,000
4,000
Cystoscopy
1,500
300,000
500
Endoscopy
1,500
600,000
500
Total
10,000
$
3,375,000
5,000
1. What are the Day Op Suite’s total expenses?
2. What are the Cystoscopy Department’s total expenses?
3. What are the Endoscopy Department’s total expenses?
Use the following information for questions 4, 5, and 6.
Your hospital has been approached by a major HMO to perform
all their MS-DRG 470 cases (major joint procedures). They
have offered a flat price of $10,000 per case. You have
reviewed your charges for MS-DRG 470 during the last year and
found the following profile:
Average Charge
$15,000
Average LOS
5 Days

3. Cost/Charge
Variable Cost %
Routine Charge
$3,600
0.80
60
Operating Room
2,657
0.80
80
Anesthesiology
293
0.80
80
Lab
1,035
0.70
30
Radiology
345
0.75
50
Medical Supplies
4,524

4. 0.50
90
Pharmacy
1,230
0.50
90
Other Ancillary
1,316
0.80
60
Total Ancillary
$11,400
0.75
50
4. In the above data set, assume that the hospital’s cost to
charge ratio is 0.80 for routine services and 0.75 for all other
ancillary services. Using this information, what would the
average cost of MS-DRG 470 be?
5. Estimate the variable cost per MS-DRG 470 using the
departmental cost/charge ratios and variable cost percentages.
6. The HMO in the above example has indicated that their
doctors use less expensive joint implants. If this less expensive
implant is used, your medical supply charges would be reduced
by $2,000. What is the estimated reduction in variable cost?
Use the following information for problems 7, 8, and 9.

5. You have been asked to establish a pricing structure for
radiology on a per-procedure basis. Present budgetary data is
presented below:
Budgeted Procedures
10,000
Budgeted Cost
$400,000
Desired Profit
$80,000
It is estimated that Medicare patients comprise 40 percent of
total radiology volume and will pay on average $38.00 per
procedure. Approximately 10 percent of the patients are cost
payers. The remaining charge payers are summarized below:
Payer
Volume %
Discount %
Blue Cross
20
4
Unity PPO
15
10
Kaiser

6. 10
10
Self Pay
5
40
50%
7. What rate must be set to generate the required $80,000 in
profit in the preceding example?
8. If the forecasted volume increased to 12,000 procedures and
budgeted costs increased to $440,000, while all other variables
remained constant, what price should be established?
9. Assume that the only change in the original example data is
that Blue Cross raises their discount to 20 percent. What price
should be set?
10. Calculate the breakeven price from the following
information.
quantity of services = 3,000
fixed costs = $45,000
average cost per unit = $150.00
required profit = $30,000
5