You have been asked by management to explain the variances in cost under your inpatient
capitated contract. The following data is provided:
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
What dollar amount of the total variance is attributed to enrollment variance?
(a) $299,250
(b) 0
(c) None of the above
What dollar effect did the increased admission rate have on cost?
The intensity of care delivered dropped from a budgeted case rate of 0.90 to an actual case mix of
0.85. What dollar effect did this have on costs?
To calculate the dollar amount of the enrollment variance, we need to determine the difference in the actual and budgeted number of members.
The formula to calculate the enrollment variance is:
Enrollment Variance = Actual Members - Budgeted Members
In this case, the actual and budgeted number of members is the same, which is 42,000. Therefore, the enrollment variance is zero.
So, the correct answer to the first question is (b) 0.
To calculate the dollar effect of the increased admission rate on cost, we need to calculate the difference in the actual and budgeted admission rates and multiply it by the budgeted cost per case.
The formula to calculate the dollar effect of the admission rate variance is:
Admission Rate Variance = (Actual Admission Rate - Budgeted Admission Rate) * Budgeted Cost per Case * Actual Members
In this case, the actual admission rate is 0.095 and the budgeted admission rate is 0.070. The budgeted cost per case is $4,900.
Using the formula:
Admission Rate Variance = (0.095 - 0.070) * $4,900 * 42,000
Admission Rate Variance = 0.025 * $4,900 * 42,000
Admission Rate Variance = $51,750
So, the increased admission rate had a dollar effect of $51,750 on cost.
For the second question, the drop in case mix index from a budgeted rate of 0.90 to an actual rate of 0.85 will also have an impact on costs. To calculate the dollar effect, we need to subtract the actual case mix index from the budgeted case mix index and multiply it by the budgeted cost per case.
The formula to calculate the dollar effect of the case mix index variance is:
Case Mix Index Variance = (Actual Case Mix Index - Budgeted Case Mix Index) * Budgeted Cost per Case * Actual Members
In this case, the actual case mix index is 0.85 and the budgeted case mix index is 0.90. The budgeted cost per case is $4,900.
Using the formula:
Case Mix Index Variance = (0.85 - 0.90) * $4,900 * 42,000
Case Mix Index Variance = -0.05 * $4,900 * 42,000
Case Mix Index Variance = -$10,500
So, the drop in case mix index had a dollar effect of -$10,500 on costs.
Therefore, the correct answer to the second question is -$10,500.