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Breakeven point is a managerial accounting term that relates to the point at which the fixed costs are covered (no author, 2013). The breakeven point can be expressed as a dollar value of revenue, or it can be expressed as a number of units (in a simple one-unit firm). There is a breakeven point for services as well as for goods. For a health care institution, the breakeven point should be expressed in dollar value of revenue. The text uses the per unit method, but no health care institution only performs one kind of service. Such an approach is more appropriate for determining the pricing of an individual service, but only then when the demand for that service is known, which is often not the case in health care. The text defines the breakeven point as an understanding of the relationship between cost, volume and profit.
Calculating the breakeven point is a relatively simple process on paper. The first step is to understand the company's cost structure. When the fixed costs are known, the company then knows that in order to turn a profit, it needs to have a contribution that is...
The contribution is the revenue less the variable costs.
Knowing the breakeven point is a valuable tool for management. The managers can identify a target revenue, and worth within the confines of the health care payment scheme. As the text points out, the multi-payer model necessitates an adaptation in the breakeven point method, since the company has widely fluctuating bargaining power for pricing its services, depending on the payer. A three-payer model is outlined to help explain how a more complex version of breakeven analysis might be used in the health care industry. A practitioner is likely to refine the model further, estimating the payer percentages for different types of procedures. By examining the fixed costs of the organization and then evaluating the fairly complex nature of demand and pricing in the health care context, a company has the ability to understand where its revenues are likely to fall in relation to fixed costs. This allows management to either seek more revenue streams or to reduce fixed costs where such…
References:
Cleverley, W., Song, P. & Cleverely, J. (2011). Essentials of Health Care Finance. Sudbury, MA: Jones & Bartlett Learning
No author. (2013). Break-even point. AccountingCoach.com. Retrieved September 30, 2013 from http://www.accountingcoach.com/online-accounting-course/01Xpg01.html
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