Finance Assignment III: Chapter 5 1. Explain the differences between fixed costs, semi fixed costs and variable costs

The differences between fixed costs, semi-fixed costs and variable costs has to do with the amount of services provided. Variable costs are cost that are expected to increase and decreases with volume (patient’s days, number of visits, etc...). Fixed costs are costs expected to remain constant regardless of volume. Semi-fixed costs are those that are fixed with in ranges that are less than the relevant range.

2. Total Costs are made up of what components?

Total costs are made up of two components fixed costs + variable costs 8. What are the Critical Differences in profit analysis when conducted in a capitated environment versus a fee-for-service environment?
In the fee-for service graph the total revenues line is sloping upwards. However, in a capitated environment, the total revenues line is horizontal, which shows that total revenue is the same number regardless of volume as measured by the number of visits. Under capitation, revenue is being driven by the insurance contract (I.e., by the premium payment and the number of covered lives, or enrollees). This change in the revenue source is the core of the logic switch from fee-for-service to capitation; the clinic is being rewarded to manage the healthcare of the population served rather than merely to provide services.

10. a. What cost structure is best when a provider is primarily capitated? Explain
The cost structure that is best when a provider is primarily capitated is fixed costs. This assumes a fixed number of lives covered. The revenue stream is fixed regardless of the volume of services provided. Financial risk is minimized by having a cost structure that matches its revenue structure. (Revenues not related to volume)
b. What cost structure is best when a