Running head: Cost, Payment and Profit Analysis

Cost, Payment and Profit Analysis

Sharon Bailey
AH531
Keith LaPrade
June 28, 2016

Running head: Cost, Payment and Profit Analysis

The four major concerns of using the cost-to-charge ratio are: ratios used may be typical
for the industry but it may not apply well to any particular organization, the CCR ratio may be
inaccurate, if fixed and variable costs change, the ratio my provide an inaccurate measure, and if
an overall ratio is used for all procedure the CCR my underestimate the cost of individual
procedures (Zelman, McCue, Glick, & Thomas, 2014).
The relationship between the concepts cost allocation as used in the step-down method
and cost driver as used in the ABCs is both seek to assign costs from each support centers
(utilities, administration, and laboratory), and both need to account for changes made in costs
doing certain activities (Zelman, McCue, Glick, & Thomas, 2014).
The difference between cost objects direct cost and its fully allocated cost is where a
company assigns cost object to a specific location. Cost object can take on many different forms
like a specific customer, or a specific location just to name a few. Fully allocated costs are where
direct costs and indirect costs are summed up together. Direct cost can be traced to a particular
person or object. An example if cost has been assigned to the marketing department, anything
associated with marketing is direct cost. If more departments are added cost is directed different
ways the marketing department salaries have become indirect cost because it is not easy to track
the cost object.
The advantages of the ABCs relative to the step-down method is when accurate
information is provided it can lead to better decisions, when there is an increase in knowledge it
can lead to process improvements and lower costs. The disadvantages are the ABCs can be
costly to implement, utilizing fixed costs can be misleading, and benefits may not outweigh
costs.

Running head: Cost, Payment and Profit Analysis

The units of services on which cost-based payers may pay providers are per procedure,
per inpatient day, per admission, per discharge, and per diagnosis.
Co-payments and deductible reduce risk because a percentage has been set up by the
health care organization and the insurance company. Once the percentage of the insurance
company has been set then patients will pay their part which can reduce them having a bill and
knowing what percentage his/her insurance company will pay.
Providers desire steerage because they already have a plain with health care providers
where they will receive a percentage of the patients visits. Health care providers agree to
provide services to patients at a discounted price. When patents go to a doctor in network it not
only help the provider it also help his/her insurance carrier, because they do not have to pay
those extra fees for going out-of network.
The insurance company bears the risk of the flat fee system. The flat fee system is agreed
upon by the insurance company and the organization. A flat fee is where the payee pays the
organization regardless of what services that were rendered they will have a flat fee to pay. The
insurance company and the payer can lose out depending on the services provided.
HMOSs determine their premiums based on age, family size, geographic location, and
tobacco use. It can also be based on your tobacco use. Insurance companies can charge a higher
premium for those that smoke because of the high risk of health issues.
If an HMO covered 150,000 lives, expected 25 myocardial infarctions (MI) to occur each
year within the covered lives, would expect a length of stay of 4.5 days for each MI, and had to
pay an average of $950 per day for each day the MI patient was in the hospital, what would the
PMPM cost of the HMO be? What would have to be charged to the patient/employer if the HMO
had administrative costs equaling 10 percent of its costs and it wanted a profit margin of 7

Running head: Cost, Payment and Profit Analysis

percent? 25 * (4.5 * 950)/12, (25 * 4275) / 12, 106875/12=8906.5, cost = 950 per day, 10%
Admin=95, 7 %( 1045) =73.15, Total cost=1118.15, 25 * (1118.14 * 4.5)* 1/12=10482.66

Running head: Cost, Payment and Profit Analysis

References
Rojas, E. (2015). The Disadvantages & Advantages of Activity Based Costing
http://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html
Zahorsky, R (2012). Facing the Alternative: How Does a Flate Fee System Really
Work.
http://www.abajournal.com/magazine/article/facing_the_alternative_how_does_a_flat_fee_syste
m_really_work
Zelman, W., McCue, M., Millikan, A. & Glick, N. (2014). Financial management of
health care organizations: an introduction to fundamental tools, concepts, and applications (4th
ed.)