Pearland Medical Center owns a small satellite clinic, specializing in General Practice, located at nearby Pearland airport. General Practice Clinic’s sole payor is Air Health, a health care plan that covers the airport employee population. Air Health has been paying on a fee-for-service basis; however, recently, its covered population increased and it proposed a capitation contract for the next year with an annual capitation payment of $150 for each of its 20,000 covered members. Previous experience indicates that the covered population will average 2 visits per year to General Practice Clinic. General Practice Clinic generates annually $1,150,000 fixed cost, which includes $550,000 in direct cost and $600,000 in allocated overhead. Each visit to General Practice Clinic generates $45 in variable costs.
1. Construct the base pro forma profit and loss statement on the capitation contract based on the number of visits for the clinic.
2. What is the clinic’s contribution margin on the contract? What is the clinic’s breakeven point under this capitation contract in the number of visits?
3. Construct the base pro forma profit and loss statement on the capitation contract based on the number of members for the clinic.
4. What is clinic’s breakeven point under this capitation contract in the number of members?
To answer these questions, we need to calculate the revenue and costs associated with the capitation contract for the General Practice Clinic.
1. Construction of the base pro forma profit and loss statement based on the number of visits:
a. Revenue: The clinic will receive a capitation payment of $150 for each of the 20,000 covered members. Since the average number of visits per member is 2, the total number of visits for the clinic is 40,000. Therefore, the total revenue from the capitation contract is $150 x 40,000 = $6,000,000.
b. Costs:
- Fixed costs: The fixed cost for the clinic is $1,150,000.
- Variable costs: Each visit to the clinic incurs variable costs of $45. Since there are 40,000 visits, the total variable costs are $45 x 40,000 = $1,800,000.
Based on these calculations, the profit and loss statement for the clinic on the capitation contract is as follows:
Revenue: $6,000,000
Costs:
- Fixed costs: $1,150,000
- Variable costs: $1,800,000
Total Costs: $2,950,000
Net Profit/Loss: Revenue - Total Costs = $6,000,000 - $2,950,000 = $3,050,000
2. To calculate the clinic's contribution margin on the contract, we need to subtract the variable costs from the revenue:
Contribution Margin = Revenue - Variable Costs
Contribution Margin = $6,000,000 - $1,800,000 = $4,200,000
The breakeven point under this capitation contract in the number of visits is where the contribution margin equals the fixed costs. Divide the fixed costs by the contribution margin per visit to find the breakeven point:
Breakeven Point = Fixed Costs / Contribution Margin per Visit
Breakeven Point = $1,150,000 / ($6,000,000 - $1,800,000)
Breakeven Point = $1,150,000 / $4,200,000 ≈ 0.27
Therefore, the breakeven point is approximately 0.27 visits per covered member, meaning that the clinic must have at least 0.27 visits per covered member to cover its fixed costs.
3. Construction of the base pro forma profit and loss statement based on the number of members:
a. Revenue: The clinic will receive a capitation payment of $150 for each of the 20,000 covered members. Therefore, the total revenue from the capitation contract is $150 x 20,000 = $3,000,000.
b. Costs: The costs remain the same as in question 1 since they are not affected by the number of members.
Based on these calculations, the profit and loss statement for the clinic on the capitation contract based on the number of members is as follows:
Revenue: $3,000,000
Costs:
- Fixed costs: $1,150,000
- Variable costs: $1,800,000
Total Costs: $2,950,000
Net Profit/Loss: Revenue - Total Costs = $3,000,000 - $2,950,000 = $50,000
4. The breakeven point under this capitation contract in the number of members is where the contribution margin equals the fixed costs. Divide the fixed costs by the contribution margin per member to find the breakeven point:
Breakeven Point = Fixed Costs / Contribution Margin per Member
Breakeven Point = $1,150,000 / ($3,000,000 - $1,800,000)
Breakeven Point = $1,150,000 / $1,200,000 = 0.96
Therefore, the breakeven point is approximately 0.96 members, meaning that the clinic must have at least 0.96 covered members to cover its fixed costs.
1. To construct the base pro forma profit and loss statement based on the number of visits for the clinic under the capitation contract, we need to calculate the total revenue and total costs.
Total Revenue:
Annual capitation payment per member: $150
Number of covered members: 20,000
Total Revenue = $150 x 20,000 = $3,000,000
Total Costs:
Fixed Costs (including direct costs and allocated overhead): $1,150,000
Variable Costs per visit: $45
Number of visits per member per year: 2
Number of covered members: 20,000
Total Variable Costs = Variable Costs per Visit x Number of Visits per Member x Number of Covered Members
= $45 x 2 x 20,000 = $1,800,000
Total Costs = Fixed Costs + Total Variable Costs
= $1,150,000 + $1,800,000 = $2,950,000
Profit = Total Revenue - Total Costs
= $3,000,000 - $2,950,000 = $50,000
Therefore, the base pro forma profit and loss statement on the capitation contract based on the number of visits for the clinic is:
Revenue: $3,000,000
Costs: $2,950,000
Profit: $50,000
2. The clinic's contribution margin can be calculated as:
Contribution Margin = (Total Revenue - Variable Costs) / Total Revenue
Contribution Margin = ($3,000,000 - $1,800,000) / $3,000,000
= $1,200,000 / $3,000,000
= 0.4 or 40%
The clinic's breakeven point under this capitation contract in the number of visits can be calculated as:
Breakeven Point (Visits) = Fixed Costs / Contribution Margin
Breakeven Point (Visits) = $1,150,000 / 40%
= $1,150,000 / 0.4
= 2,875 visits
Therefore, the clinic's breakeven point under this capitation contract in the number of visits is 2,875 visits.
3. To construct the base pro forma profit and loss statement based on the number of members for the clinic under the capitation contract, we need to calculate the total revenue and total costs.
Total Revenue:
Annual capitation payment per member: $150
Number of covered members: 20,000
Total Revenue = $150 x 20,000 = $3,000,000
Total Costs:
Fixed Costs (including direct costs and allocated overhead): $1,150,000
Total Costs = Fixed Costs = $1,150,000
Profit = Total Revenue - Total Costs
= $3,000,000 - $1,150,000 = $1,850,000
Therefore, the base pro forma profit and loss statement on the capitation contract based on the number of members for the clinic is:
Revenue: $3,000,000
Costs: $1,150,000
Profit: $1,850,000
4. The clinic's breakeven point under this capitation contract in the number of members can be calculated as:
Breakeven Point (Members) = Fixed Costs / Annual Capitation Payment
Breakeven Point (Members) = $1,150,000 / $150
= 7,667 members
Therefore, the clinic's breakeven point under this capitation contract in the number of members is 7,667 members.