Chapter-7 questions/problems
2-12-15

7.1a A price taker - a business that has no power to influence the prices set by the marketplace. Within a hospital setting must take the prices set in the marketplace and have little influence over reimbursement rates. Because of competition and insurance company dominance most healthcare providers are price takers. Price takers typically will take the price as a given and focus on management to ensure profitability of healthcare services. If a provider dominates the market with differentiated services such as outcomes, convenience then the provider can set market prices on services or are price setters. In the healthcare arena, the status between price setter and taker can change quickly or can be a price setter in one area e.g. cardiac surgery, but a price taker in others depending upon the marketplace.
7.2 a (no b?)
a. Full cost pricing for price setters sets prices that recover all costs of a particular service direct fixed and variable costs, overhead plus a profit component. Marginal costs prices cover incremental costs which typically refers to recovering only direct variable costs.

7.4
a. Cross subsidization or cost shifting refers to overcharging some insurers as compared for full costs while others are undercharged. Today cost shifting often covers governmental payers like Medicaid, Medicare. Payers faced with increased cost are demanding prices cover only true costs.

7.5
a. Target costing is a management strategy used by price takers in which revenue is projected assuming prices as given in the marketplace , required profits are subtracted from the revenue and the remainder is the target cost level. In essence, target costing takes the market prices as a given and then determines the cost structure necessary to achieve financial viability. The benefit of target costing is that it forces manager to