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Chemistry proFinkler Residential Treatment Facility anticipates that it would have 25,000 patient-days next year. This is substantially below its capacity of 35,000 patient-days per year. Facility has variable costs of $75 per patient-day. Its fixed costs are $1,500,000 per year.

Health hospital has been pushed by its physician to add the open heart surgery unit. This has always been resisted on grounds that there was not adequate demand to make unit financially reasonable. Under DRG system, Healthy can expect to receive average reimbursement of $56000 per open heart surgery for each of the anticipated 100 open heart surgeries per year. Incremental costs will be expected to $60000 per case so a loss will be incurred.

Though, prestige associated with offering open heart surgery will attract new affiliations. It is expected that 10 extra general practice physicians will join staff and each of these 10 physicians will generate 20 patients per year, spread across wide variety of DRGs. Struggling has excess capacity and will welcome extra patients.

It is expected that average DRG reimbursement for these new patients will be $28000. The average cost is expected to be $27800. The average marginal cost is expected to be $26400. Should health add open heart surgery as a loss leader.

problem1) Compute the average cost per patient-day for Finkler Residential Treatment Facility at the volume of 25,000 patient-days and at 30,000patient-days.

problem2) Suppose that the HMO offers to generate 5,000 patient-days per year. It presently sends no patients to Finkler Residential Treatment Facility. It is willing to pay the maximum flat amount of $90 per patient-day. Assuming that its case mix is similar to the present 25,000 patient-days, must Finkler accept its business?

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