You Have Been Asked By Management To Explain The Variances

You Have Been Asked By Management To Explain the Variances In Costs Un

You have been asked by management to explain the variances in costs under your inpatient capitated contract. The following data is provided. Use the following data to calculate the variances. Budget Actual Inpatient Costs $12,568,500 $16,618,350 Members 42,000 42,000 Admission Rate 0.070 0.095 Case Mix Index 0.90 0.85 Cost per Case (CMI = 1.0) $4,750 $4,900 Question 2. Budgeted Procedures $10,000 Budgeted Cost $400,000 Desired Profit $80,000 Payer Volume% Discount% Blue Cross 20 4 Unity PPO 15 10 Kaiser 10 10 Self Pay % Question 3. Budget Actual Wage Rate per Hour $16.00 $17.00 Fixed Hours Variable Hours per Relative Value Unit (RVU) 1.0 1.1 Relative Value Units (RVUs) 1,000 1,200 Total Labor Hours 1,320 1,640 Labor Costs $21,120 $27,880 Cost per RVU $21.12 $23.23 Question 4. Question 5. Question 6. Question 7.

Paper For Above instruction

Analyzing variances in healthcare costs, particularly under an inpatient capitated contract, is essential for healthcare administrators aiming to optimize financial performance and resource utilization. This comprehensive analysis explores the various components contributing to cost variances based on the provided data, emphasizing budget-to-actual differences, drivers of inpatient costs, outpatient procedural costs, and personnel expenditure variances.

Introduction

Cost management is a cornerstone of effective healthcare delivery, especially within capitation models where providers receive a fixed amount per patient, regardless of the actual services rendered. Variance analysis enables healthcare managers to identify deviations from budgets, understand underlying causes, and implement corrective actions to enhance financial sustainability. This paper dissects the variances presented, offering detailed calculations and insights into factors influencing inpatient, procedural, and labor costs.

Inpatient Cost Variance Analysis

The inpatient costs illustrate a significant variance, with actual costs ($16,618,350) exceeding budgeted costs ($12,568,500) by $4,049,850. To understand this discrepancy, we examine the key drivers: admission rate, case mix index (CMI), and cost per case.

First, estimating the expected inpatient volume:

- Budgeted admissions = Members x Admission Rate = 42,000 x 0.07 = 2,940 admissions.

- Actual admissions = Members x Actual Admission Rate = 42,000 x 0.095 = 3,990 admissions.

Next, calculating the expected and actual inpatient costs based on the case mix and cost per case:

- Budgeted cost per case = $4,750.

- Actual cost per case = $4,900.

Budgeted inpatient costs:

- Total expected inpatient days (assuming uniform distribution and no other data) are approximated by the formula:

Budget Inpatient Costs = Number of admissions x Cost per case x CMI (since CMI affects resource utilization):

Budgeted Inpatient Cost = 2,940 x $4,750 x 0.90 = approximately $12,534,900.

Actual inpatient costs:

- Actual admissions = 3,990,

- Cost per case = $4,900,

- Actual CMI = 0.85,

Actual Inpatient Cost = 3,990 x $4,900 x 0.85 ≈ $16,626,450.

Comparison:

- The actual costs are higher primarily due to increased admissions and a higher actual cost per case, even though the CMI decreased slightly, possibly indicating more lower-acuity cases. The significant cost variation (+$4,049,850) can be attributed to increased admission rates (from 0.07 to 0.095), increased unit cost, and possibly longer lengths of stay or more complex cases driven by patient mix shifts.

Procedural Cost Variance

For the outpatient procedures, the budgeted procedures amounted to 10,000 with a budgeted cost of $400,000, implying a cost per procedure of $40. The desired profit is $80,000, influencing the pricing strategy.

The varied percentages of payer volume and discounts show how reimbursement policies impact profitability. For instance:

- Blue Cross covers 20% of volume with a 4% discount.

- Unity PPO accounts for 15% with a 10% discount.

- Kaiser covers 10% with a 10% discount.

- Self-pay clients also affect revenue and cost considerations.

The expected revenue per payer segment can be estimated:

- Blue Cross: 20% volume x $400,000 = $80,000 gross, with 4% discount reducing the net reimbursement.

- Similar calculations for other payers yield actual revenue adjustments.

Variances in procedural costs are influenced by actual procedure volumes, negotiated discounts, and procedural complexity. If actual procedures exceeded the budget or if discounts were more significant than expected, costs could overrun the budgeted figures, reducing profitability. Conversely, efficiencies in procedure delivery or renegotiation of payer discounts could improve variance margins.

Labor Cost Variance Analysis

Regarding personnel expenditure, the wage rate increased from $16.00 to $17.00 per hour. Budgeted total labor costs were $21,120, whereas actual costs grew to $27,880, highlighting a rise of $6,760.

Differences in labor hours, driven by the increase in relative value units (RVUs) from 1,000 to 1,200, suggest higher productivity or increased service provision. The total labor hours increased from 1,320 to 1,640, reflecting more intensive work activity.

Calculations show:

- Budgeted labor cost per RVU = $21.12,

- Actual labor cost per RVU = $23.23,

indicating inefficiencies or wage inflation. The increase in wage rates and labor hours per RVU significantly contributed to cost overruns.

Conclusion

In summary, the variance analysis highlights that higher than budgeted inpatient costs stem primarily from increased admission rates and higher unit costs, coupled with changes in patient mix. Procedural cost variances are driven by payer discounts, procedural volume fluctuations, and resource utilization, affecting revenue. Labor cost increases are influenced by wage rate inflation and increased RVUs, resulting in higher personnel expenses.

To manage these variances effectively, healthcare administrators should monitor admission patterns, negotiate better payer agreements, optimize procedural workflows, and control labor costs through productivity improvements and wage management. Such analyses are critical in maintaining financial health within capitated payment models, ensuring sustainability and quality of care.

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