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Hsa Ruger Clinic

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Ruger Clinic

Assignment 2

Healthcare Financial Management


House Keeping Service Department of Ruger Clinic

Wiley (2004) defines cost volume profit (CVP) as an accounting method that is used to analyzes changes in profit as they are related to sales, volume, cost and pricing. This is an important tool for managers because the information the analysis provides is used to project various operation requirements. A cost volume profit analysis reflects: which product or service should be focused on, the volume needed to reach the maximum profit requirements, the amount of revenue required to minimize losses, how to manage fixed cost, how to budget and it can identify areas of risk (Wiley, 2004).

The Coleco Adam was a word processor that was used in the work place to run reports and it was also used as a computerized gaming program toy for children (Peel, 1984). Coleco had great expectations for the Adam; it was expected to be the item that would allow Coleco to take over the children’s electronic game market for the Christmas holiday season in 1982 (Wiley, 2004). What Coleco expected and what actually happened was two different things. Coleco also manufactured a doll called the ‘Cabbage Patch’. Both the Adam and the Cabbage Patch Doll were introduced to the market during the 1982 holiday season, the Cabbage Patch Doll became the number one selling item, while the Adam plummeted to the bottom causing Coleco to loose money on their projected priority market item.

If Coleco had done a CVP analysis they would have been more prepared to manage their product volume, pricing and risk. The company was not prepared to handle the increased product demand for the Cabbage Patch Dolls, the trickle down effect of the increased demands created a production backorder problem for the company. Along with this they lost money on producing an item that was not selling, which eventually attributed to the demise of the company.

Mosby’s Medical Dictionary (2008) defines capitation as a payment method for health care services. The methods that will be reviewed here are the: fee for service approach, cost approach and the demographic approach. Hospitals and medical offices all have to use some type of pricing strategy to determine how they will get paid for the services they are providing. Health care costs are high and increasing daily, medical facilities have to use a method of capitation that will compliment the services they provide.

The demographic approach of capitation is used mostly in countries that have a social health care system such as the United Kingdom, Canada and France. In this method health care payment is decided by the demographic area of the medical facility, the demographics that are used is age, and gender (Shoo, 2012). In countries with free health care using the demographic method appears to be logical, funds can be distributed the demographic group that needs to the most attention. Elderly people and small children may require more medical attention then the 20 – 35 demographic groups.

In the fee for services approach the healthcare services provided by a medical facility is paid by each patient. When using this method the more patients a medical facility has the more money that facility will make. Shoo reports (2012) that when using method and depending on what state the facility is in the rate schedule may be determined by a Health Maintenance Organization (HMO) or by the state. In this situation the patient will pay the facility for the services provided and the HMO will reimburse the patient and/or the state will set the rate for services (Shoo, 2012).

The last approach we will look at will be the cost approach. When medical facilities use the cost approach a fixed rate is determined for each service that is provided based on the cost of that particular service. This means that no matter how many patients a facility may perform services for the rate of pay is the same; the facility can not raise or lower rates for anyone.

When comparing the three options no method appears to out weigh the other. There are factors in each that can be an advantage and disadvantage. In the demographic approach if the 20 - 35 demographic groups suddenly have a spike in health care issues the facility may not be financially supported to properly care for the increase services to this group. Possibly the fee for services approach would better serve in this situation. The increase will allow the facility to receive payment for patients based on the services provided versus based on their demographic groups. If funds are not readily available to meet the increase this could cause a problem for the facility using the demographic approach.

Looking at the cost approach medical facilities could lose money or increase profit based on how payment for services are set. If a service under valued the facility can lose money on that service, especially if it is a high volume service. If a service is overrated the facility may be over paid for that particular service putting an increased burden on the patient to pay a higher rate. Comparing the three methods it would appear that the fee for service approach may be the method that would best serve the medial facility overall.

Budgeting for medical facilities is an important aspect to the success of that facility. Conventional approaches to budgeting and zero-based budgeting are two approaches used to create budgets. When using the conventional approach the budget is determined by using historical information, last year’s budget. The budget for the previous year is used to determine the budget for the following year. In the zero-based approach the budget is create from a blank sheet.
There is no comparison to what happened the year before. Managers are required to project what they will need for the coming year and budget for them accordingly. In the conventional approach using historical data is useful however it may cause a department to over or under budget based on last years number. When using the zero-based approach may not having historical data to review may also cause departments to over or under budget and it could cause some services to be over looked. Gapenski (2008) writes that some health care facilities have made a compromise and use the both methods to create their budgets. The zero-based approach may be used once every 3 – 5 years because it is good thing to start from zero at times, while they will use the convention approach on a yearly basis; because historical data has value and adds value to the budgeting process (Gapenski, 2008).


The value of cost pool is 100,000


Allocation Rate = Cost / Patient Service Revenue

100,000 / 5,000,000

= 0.02 per patient service revenue


Allocation Rate = Cost / Book keeping Service

100,000 / 5,000

= 20 per housekeeping hours


Gapenski. L.C. (2008). Healthcare Finance: An Introduction to Accounting and Financial

Management. (4th ed.). Chicago, IL: Health Administration Press.

Mosby’s Medical Dictionary. (2008). Definition: Capitation. Retrieved from

Peel, K. (1984). Magazine: Your Computer. Retrieved from

Shoo, D. (2012). Three Methods of Developing Capitation Rates. Retrieved from

Wiley. (2004). Cost Volume Profit and Analysis. Retrieved from

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