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7.4 Assume that Valley Forge Hospital has only the following three payer groups:

                             Number of            Average revenue               Variable cost

Payer                   admissions            per admission                    per admission

PennCare            1,000                      $5,000                                 $3,000

Medicare             4,000                      $4,500                                 $4,000

Commercial         8,000                      $7,000                                $2,500

The hospital’s fixed costs are $38 million.

What is the hospital’s net income?Assume that half of the 100,000 covered lives in the commercial payer group will be moved into a capitated plan. All utilization and cost data remain the same. What PMPM rate will the hospital have to charge to retain its part a net income?What overall net income would be produced if the admission rate of the capitated group were reduced from the commercial level by 10 percent?Assuming that the utilization reduction also occurs, what overall net income would be produced if the variable cost per admission for the capitated group were lowered to $2,200?

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