HCAD 640 9041 Financial Management for Health Care Organizations

1. Running head: COSTANALYSIS 1
Cost Analysis: The Purchase of Healthcare Facility Equipment Team Project
Modupe Sarratt
Tiffanie Cantron
Tyana Trotz
UMUC
HCAD 640 9041
Author Note
The Case for Project of Cost Analysis is available online for Multiple Analysis

2. COSTANALYSIS 2
Abstract/Summary
The presented proposal or the array acquisition provided brief but comprehensive information
about the acquisition background, drivers behind decision to include cost analysis with
breakeven points, current operations and revenue generated based off of Medicare payouts.
Given the information through this short analysis it can be determined that at current test
performed averages, the hospital would benefit from the purchase of the array machine based on
its five year life span. Calculations indicate that the acquisition would generate a revenue
increase. A deprecation schedule on the equipment will also benefit the hospital for tax purposes.
One problem area could be the pay out of Medicare benefits for these test performed. The
hospital could lose money if only certain percentages were paid if the acquisition were made.
The offsite lab would be the better option for the hospital due to the current operation if
Medicare payments were lower. The added benefit of the acquisition is also diagnosis time on
test with the array. Retrieved from www.justanswer.com/multiple-problems/7x1ap-case-project-
cost-analysis.html

3. COSTANALYSIS 3
Cost Analysis: The Purchase of Healthcare Facility Equipment Team Project
Acquisition Background
If the Break Even point were based on the total cost of the equipment figured over its life
span, then the total annual fixed cost would be $10,000 per year. This would mean that the total
amount of autoimmunity test per year of 556 tests would be needed to break even. This can be
calculated utilizing the same formulas above but replacing the $50,000 total cost with the
$10,000 total cost per year over 5 years. An equipment acquisition proposal had been received by
a health care organization for a medical array machine. The purpose of this analysis is to prove to
the board that this acquisition proposal of the array machine is indeed beneficial to the hospital
and will increase revenue and profits.
Break EvenAnalysis
Based on the current operation, the hospital sends lab work to an off-site laboratory to
perform autoimmunity tests. On average the hospital performs test of one of each of the five
autoimmunity tests per day, for a total of five tests. The hospital pays the off-site laboratory $10
per test and charges patients $20 per test. The proposal notes that the hospital could keep these
tests on-site and profit by the purchase of the array machine. The hospital would have to pay
approximately $2 per test for reagents. The hospital performs 1,560 tests per year. First, it is
important to understand the Break Even Analysis on this purchase. The following shows the
Break Even Analysis figures based on the equipment’s five-year life span and how many
autoimmunity tests per year that would have to be performed on the array machine to break even:
R = Revenue P = Revenue Received Per Unit Sold
F = Fixed Costs S = Number of Units Sold
V = Variable Costs B = Break Even Number Units Sold

4. COSTANALYSIS 4
T = Total Costs
Total Fixed Cost (T) = $50,000
Variable Cost Per Unit (V) = $2.00 - Reagent costs
Sales Price Per Unit (P) = $20.00
The following shows the Break Even Formulas for units sold and dollars.
Break Even Point Formula Units B = F / (P – V)
Break Even Point (Units) B = $50,000 / (20-2)
B = $50,000 / 18
B = 2777.7 or 2778 Units
Break Even Point (Dollars) B = B (Units) * P
B = 2,778 * 20
B = $55,555.5556 or $55,556
Based on the information presented above, the hospital will have to perform 2,778 tests to
reach the Break Even amount of $55,556. The formula uses the total cost of the machine, the cost
of the reagents and the total sales price of each test to calculate the breakeven points.
If the Break Even point were based on the total cost of the equipment figured over its life
span, then the total annual fixed cost would be $10,000 per year. This would mean that the total
amount of autoimmunity test per year of 556 tests would be needed to break even. This can be
calculated utilizing the same formulas above but replacing the $50,000 total cost with the
$10,000 total cost per year over 5 years.The cost of the array machine is 50,000. Test are run
Monday through Saturday, which excludes Sunday. The cost per day for the technician to
calibrate the machine in $15.00. The machine has to be calibrated Monday through Saturday,
which factors out Sundays. That’s 365 days a year -52 Sundays in a year. The total days to

5. COSTANALYSIS 5
calibrate is 313 days. The cost of the technician per year is 313days multiplied by $15 which
equals $4,695.
 313 days *$15= $4,695
The total fixed cost is $54,695. The Break Even formula per units is equal to:
 Total Fixed Cost/Profit Per Unit- Variable Cost Per Unit
=$54,695/$20-$12
=$54,695/$18
=3,039 test to break even cost
Net Contribution
Based on the current test that are accomplished by the hospital the following can be calculated:
 1,560 tests are accomplished per year at $20 per test yielding a total of $31,200 in
revenue.
 1,560 tests are accomplished per year and the variable cost per tests is $2 yielding a total
variable cost of $3,120.
 Based on lecture notes the total contribution would take the total revenue of $31,200
minus the total variable cost of $3,120 totaling $28,080.
Given this information, it is important to further understand the full scope of the
acquisition by addressing the net gain from the addition of the array or maintaining the current
off site laboratory. The figures below address the contribution of the new array opposed to the
laboratory.
If the array were to be purchased it would contribute and average net gain of $2,480.00
per year based on current operations. Although an average of five tests are accomplished per day,
it is possible usage could rise. The machine is capable of running a maximum of 40 patient

6. COSTANALYSIS 6
samples and 20 different test on each sample over a two hour period. This would be a total of
800 test every two hours at maximum capacity. It is also possible that the machine perform
apolipoprotein cardiac profiles that are currently done on equipment in the clinical chemistry
department. The hospital has a projected five tests a day built into this planning
assessment. The $2 reagent cost reduces the $20 fee charged by the hospital to $18 a
test. This will be added to show projections, and in cases it is not used there will be an
additional profit to X,Y,Z. Tests will be conducted six days a week at ten hours for tests
because each test takes approximately two hours to complete, and there is an hour for
technician servicing times. This calculates to 312 days a year at $18 a day multiplied by
five to represent the expected volume. This equates to $28,080 in revenue annually. The
$10,000 depreciation fee will reduce the profit making the new projected profit $18,080.
Also, the technician fee of $15 an hour per day will further reduce the profit by
$4,680 annually making the profit of the machine $13,400 annually. The machine costs
$50,000. Upfront costs will be high, and the life span of the machine is short. However, over five
years the projected net contribution of the machine is expected to be at minimum $67,000. If the
machine were used to full capacity it could profit $224,640 annually; 312 days multiplied by
40 patients a day and one test each at $18. Taking away depreciation and technician fees
would reduce the profit to around $210,000.
The projected base net contribution will be small but will save the X,Y,Z Health
Care organization the $10 fee of sending a test to an outside lab. The organization will
be making an $8 profit per test by charging $20 minus the $2 reagent fee. The
organization will be making a $12,480 profit compared to having to pay $10 to an
outside agency. Basically they keeping their $10 and adding an additional $8 profit in
order to cover costs of the machine. Purchasing the machine would be a positive

7. COSTANALYSIS 7
projected financial move for X, Y, Z to make.
Medicare Coverage (DRG) and Payments
In many cases, most patients utilize some form of medical insurance to cover medical
expenses. If half of the patients utilizing the new array were using Medicare, most of the
payments would be covered for the autoimmunity tests. This coverage could be affected by a
copay or percentage the Medicare coverage is willing to pay for all of the tests required.If half of
the patients could not pay and if Medicare DRG reimbursement only paid 74% of the tests cost.
The hospitals revenue could vary based on the payments made by Medicare. Although DRG
reimbursement includes all tests, Medicare covered 74% of the test, the revenue changes from
$18,080.00 a year at full pay to $13,379.20 per year. This could mean a difference of $4,700.80
in revenue. Based on these calculations, the purchase of the array machine is still a value added
asset to the health care organization.
The alternative, we reflect the opposite to the above for the utilization of an offsite lab
and the Medicare payouts. Assuming the information is the same, the hospital is currently
averaging 1560 test performed per year. At full payout minus the expenses to the lab the hospital
revenue is $15,600.00 per year. If Medicare covered only 74% of the cost per tests, the hospital
would receive $11,544.00 per year, which would be a difference of $4,056.00 from the full pay
amount. Factoring into the alternative for the difference, the decision to acquire the equipment is
better for profit considering the price for the equipment, the difference $4,700.80 minus
$4,056.00 equal $644.80 revenue per test.
Summary on Decision
The obtainable proposal or the array acquisition provided brief but comprehensive
information about the acquisition background, drivers behind decision to include cost analysis

8. COSTANALYSIS 8
with breakeven points, current operations and revenue generated based off of Medicare payouts.
Given the information through this short analysis it can be determined that at current test
performed averages, the hospital would benefit from the purchase of the array machine based on
its five year life span. Calculations indicate that the acquisition would generate a revenue
increase of $644. 80. A deprecation schedule on the equipment will also benefit the hospital for
tax purposes.
One problem area could be the pay out of Medicare benefits for these test performed. The
hospital could lose money if only certain percentages were paid if the acquisition were made.
The offsite lab would be the better option for the hospital due to the current operation if
Medicare payments were lower. The added benefit of the acquisition is also diagnosis time on
test with the array. Test turn around would drop by two days performing test in house.

9. COSTANALYSIS 9
References
Cortera. (2012) Cortera Company Profile: Fairfield Medical Associates. Company Details.
Retrieved on 25 March, 2012 from
http://start.cortera.com/company/research/k3j5qqk2m/fairfield-medical-associates-pa/
Harbison, B. (2012). Personal Communication. Interview Conducted on March 26, 2012 at
Fairfield Medical Associates facility.
Moylan, C. (2006) National Association of Public Hospitals and Health Systems: Managing Care
for Uninsured Patients. National Study. Retrieved from
http://naph.org/Publications/managingcareforuninsuredpatients.aspx
Puder, F., Keller, U. (2003). Swiss Medical Weekly: Quality of diabetes care: problem of patient
of doctor adherence? Volume 133 (pp. 530-534). Retrieved from Science Direct