1. Business Planning for Health Organizations ID 536 April 25, 2008 Paul Campbell Harvard School of Public Health

2. 2 Agenda Q &A Cash Flow Projections: Aftrain - Cameroon Cost Analysis Methods: Sunset Health Ctr. –Full cost –Differential cost Breakeven Analysis: Lakeside Hospital

3. 3 Sunset Health Center Full Cost Analysis Program Full Costs$450,000 Program Revenues 385,000 Net Loss………………...($ 65,000)

4. 4 Sunset Health Center Differential Cost Analysis Costs Incurred with the Decision$ 350,000 Program Revenues$ 385,000 Contribution………………$ 35,000

5. 5 Potential Applications for Full Cost Analysis  Setting prices  Cost reports for reimbursement  Cost-Effectiveness Analysis

6. 6 Differential Cost Analysis Defined: An examination of costs (as well as volume and revenue, etc.) related to “alternative choice decisions.” Anthony and Young, 1994

7. 7 Potential Applications for Differential Cost Analysis  Keep or drop a service  Perform work in-house or contract out  Adopt or reject a business plan proposal

8. 8 Breakeven Analysis Definition: An examination completed to determine the volume of an activity required to balance revenues and costs.

9. 9 Breakeven Analysis Revenue $Costs Breakeven Volume

10. 10 Breakeven Analysis Calculation: Total Revenues = Total Costs TR = FC + Var. C Volume = “x” TR = FC + Var. C (x)

11. 11 Sunset Health Center How many visits must be provided for the potential elderly project to breakeven, if only differential costs are included? Note: Assume that costs related to staff and equipment are fixed and that costs related to supplies, and other elderly project costs are variable.

12. 12 Sunset Health Center TR = FC + Var. C (x) Rev (x) = FC + Var. C (x) 55x = 287,000 + 9x x = 6,240 Visits

13. 13 Sunset Health Center (2) How many visits must be provided for the potential elderly project to breakeven, if full costs are included in the analysis?

14. 14 Sunset Health Center (2) TR = FC + Var. C (x) Rev (x) = FC + Var. C (x) 55x = 387,000 + 9x x = 8,413 Visits

15. 15 Lakeside Hospital

16. 16 Lakeside - Breakeven Analysis Revenue $Costs 20 Patients Current Volume

17. 17 Lakeside - Breakeven Analysis Revenue $Costs 20 25 Volume

18. 18 Lakeside - Breakeven Analysis Revenue $Costs 15 20 25 Volume

19. 19 Decision-Making Process 1.Compute breakeven volume with direct costs only 2.Calculate contribution to allocated costs at current volume (50% capacity) 3.Analyze assumptions underlying projections 4.Consider allocated costs 5.Include non-financial considerations

20. 20 Volume Data 40Patients at full capacity 20Patients at half capacity 3Treatments required per patient per week 156Treatments required per patient per year - (3 treatments x 52 weeks 2Shifts operating, 6 days per week

21. 21 Fixed Costs A. MINOR EQUIPMENT$11,424 B. MAJOR EQUIPMENT$13,128 C. TOTAL $ 24, 552 KEY CONCEPT: SUNK COSTS

22. 22 Sunk Costs DEFINITION: Costs which were covered in the past, which cannot be changed. APPLICATION: In differential cost analysis, only costs and revenues which will be encountered in the present and foreseeable future should be included.

23. 23 Semi-Fixed Costs A. SALARY AND WAGES B. EMPLOYEE EXPENSES COSTS FOR 2 MONTHS: (EXHIBIT 3) SALARY AND WAGES$36,400 EMPLOYEE EXPENSE 2,350 TOTAL……………………………$38,750 LESS STAFF REDUCTION -6,000 TOTAL AT 50% CAPACITY$32,750 X6 ANNUAL COST AT 50% CAPACITY $196,500 1 NURSE 2 TECHNICIANS

24. 24 Variable Costs A. MEDICAL SUPPLIES: TOTAL SUPPY COST Variable Supply Cost per # TREATMENTS=Treatment 245, 458 5, 736=$42.79 B. PURCHASED LAB SERVICES: 12, 238 5,736=$2.13 C. WATER USAGE: 10,448 5,736=$1.82 D. VAR. COST PER TR. = $46.74

25. 25 Breakeven Computation (AT 50% CAPACITY, 20 PATIENTS) FIXEDSEMI-FIXED VARIABLE PRICE (X) = COSTS + COSTS + COSTS (X) 138X =11,424 +196,500 + 46.74X 91.26X = $ 207,924 X = 2,278 TREATMENTS AT BREAKEVEN ? BREAKEVEN NUMBER OF PATIENTS 156 TREATMENTS REQUIRED BY EACH PATIENT PER YEAR 2,278 156 = 15 PATIENTS TO ACHIEVE BREAKEVEN

26. 26 Breakeven Computation AT 50% CAPACITY, 20 PATIENTS, AND ONE SHIFT FIXEDSEMI-FIXED VARIABLE PRICE(X) = COSTS + COSTS + COSTS (X) 138X = 11,424 + 124,164 + 46.74X 91.26X =135,588 X =1,486 TREATMENTS AT BREAKEVEN 156 TREATMENTS REQUIRED BY EACH PATIENT PER YEAR 1,486 = 15610 PATIENTS TO ACHIEVE BREAKEVEN

27. 27 Contribution AT 50% CAPACITY, 20 PATIENTS REVENUE: 20 PATIENTS X 156 TREATMENTS X $138 = $430,560 DIRECT COSTS: FIXED$11,424 SEMI-FIXED196,500 VARIABLE145,829(46.74 X 20 X 156) TOTAL$353,753 CONTRIBUTION TO HOSPITAL OVERHEAD $76,807

28. 28 Contribution AT 50% CAPACITY, 20 PATIENTS AND ONE SHIFT REVENUE: 20 PATIENTS X 156 TREATMENTS X $138 = $430,560 DIRECT COSTS: FIXED$11,424 SEMI-FIXED124,164 VARIABLE145,829 (46.74 X 20 X 156) TOTAL $281,417 CONTRIBUTION TO HOSPITAL OVERHEAD $149,143

29. 29 Assumptions Underlying Breakeven Calculations ASSUMPTIONS FORCES COSTSLABOR/MATERIALS SUPPLY/DEMAND INFLATION PRICEPOLITICS VOLUMECOMPETITION TECHNOLOGY LIFESTYLE AREA POPULATION

30. 30 Full Cost Calculation DIRECT COSTS$353,753 (AT 50% CAPACITY) INDIRECT COSTS$277,267 EXHIBIT 3 TOTAL COSTS$631,020 SURPLUS/LOSS PER TREATMENT: NUMBER OF TREATMENTS3,120 (20 X 156) REVENUE PER TREATMENT$138.00 FULL COST PER TREATMENT- 202.25 $631,020 3,120 LOSS PER TREATMENT ($64.25)

31. 31 Cost Analysis Matrix DIRECT/ASSIGNEDALLOCATED FIXED VARIABLE