Analyzing and Negotiating Cost Volume Profit Medical Contracts
[Profit Optimization versus Revenue Maximization]
By David Edward Marcinko
By Hope Rachel Hetico
Every decision you make is a mistake – Edward Dahlberg
A cost-volume-profit relationship exists in any healthcare entity and emphasizes the point that the goal of an efficient organization should be profit optimization, rather than revenue or volume maximization.
The profit of any healthcare facility is what’s left after all financial outflows are removed from all financial inflows. This optimization is reached at the point where patient volume, fee per patient, and costs per patient produce highest profit, not the highest revenue.
This is the point of maximum efficiency and is where you want to be. It is applicable to capitated, fee-for-service [FFS], or discounted FFS fixed contracts, and be described in the equation below.
The Profit Equation
Medical profit can be defined by the equation:
Profit = (Price x Volume) – Costs
or P = (P x V) – C
Revenue = Price x Volume
or R = PV
To increase profits, the doctor must increase price (if possible), increase volume (if possible), or decrease costs (if possible); and ideally the doctor should perform all three maneuvers simultaneously. If we assume that only costs are under the doctor’s control (a not altogether valid strategy), any strategic financial planning process that ignores them will not be beneficial.
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