HSCA 3600 – Financial Management of Healthcare Organizations

HSCA 3600 – Financial Management of Healthcare Organizations

Quiz #2 (Chapters 5, 17)

1. Identify an example of each of the following types of costs for a health services organization:

  • Fixed cost: Rent for a medical facility such as nursing home.

– Variable cost: the cost of supplies for patients, and procedures done.

2. How does one calculate a volume breakeven and what does this estimate mean?

Total revenues- total variable costs- fixed costs= Profit. Volume breakeven means a business becomes financially self-sufficient. It can also be applied to subunits within the businesses such as departments and individual services. 

3. Define the term contribution margin and its relationship to the profitability of a given good or service. 

Contribution margin is defined as the difference between per unit revenue and per unit variable cost. ( the variable cost rate) Moreover, the amount that each unit of volume contributes to cover fixed costs ultimately flows to profit. Contribution margin and its relationship to the profitability of a given good or service is calculated for individual items that the company produces and sells. Specifically the production cost of an item. 

4. What is the difference between accounting breakeven and economic breakeven?

Accounting breakeven is defined as the volume needed to produce zero profit. It is the volume that produces revenues equal to the accounting costs. Economic breakeven, is the volume needed to produce  a specific profit level. The volume that creates revenues equal to accounting costs plus some desired  profit amount.

5. What is considered an ideal cost structure for each of the following types of reimbursement environments to increase profitability?

  • Fee for service (volume-based)
  • Capitation (member-based)

6. Provide an example of each of the following types of financial ratios and briefly explain/interpret the meaning for each:

  • Profitability ratio
  • Liquidity ratio
  • Debt management ratio
  • Asset management ratio

7. For each of the following questions, identify which of the four categories of financial ratios (see question 6) is best used to answer each one:

  • Can the organization afford to borrow more money to finance a planned service line expansion?
  • How efficiently is the organization making use of its existing plant and equipment?
  • Can the organization effectively meet its short-term obligations?
  • How effective is the organization at generating a positive return to support its current operations?