Getwell Clinic Breakeven Analysis

Getwell Clinic Breakeven Analysis

University of Minnesota

ACC/HC561

May 23, 2011

Diagnosis-Related Groups (DRG) is a classification process in which health care organizations can separate patients into like categories even though patients have such broad differences. These classifications could be demographics, treatment, age, or diagnostic groupings. This helps determine the resources needed for patient treatment and the costs associated with the treatment. Understanding the breakdown of patient groupings managers can review them and better understand the services rendered, and if a service should be added or concluded from the practice.

DRG analysis helps managers in health care determine levels of service at which to operate and to break even as well as avoid any loses. Using the DGR analysis, management will be able to determine the appropriate levels at which to operate making the most of any profits (Steven, & David, 2000). The management team of the health care organization will be able to determine the level at which marginal costs are at a minimum hence maximizing profits on services in excess of the break even figure. Using the DRG analysis, the organization will be able to arise with strategies that minimize costs and operate at levels of service above the break-even point so that the organization does not incur any losses in revenue.

The major drivers of the DRG are the principle diagnosis and procedure codes and the secondary diagnosis codes that are complications or co-morbidities.

All figure per unit DRGM DRGJ DRGP

Sales $1700 $2600 $900

Less VC ($1000) ($1200) ($900)

CM $700 $1400 $300

Hours required 2hrs 5hrs 1hr

Contribution per hour $350 $280 $300

Fixed cost $500,000 $280,000 $110,000

Calculation of Break Even Points

Contribution = sales – variable cost

Therefore, contribution margin for each DRG is calculated as follows:

Figures (/unit) DRGM, DRGJ, DRGP

Sales in ( $) 1700 2600 900

Less Variable...