When conducting breakeven Analysis for a new service at a healthcare facility
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The Hospital Cost Tool provides payers and regulators with data on 4,600 hospitals nationwide for the period from 2011 through 2019 to better understand and address hospital costs. Show The tool identifies costs using data that hospitals report to the federal government annually through a Medicare Cost Report (MCR) — the only national, public source of hospital costs. Each hospital that serves Medicare patients must annually submit, and verify the accuracy of, an MCR to the Centers for Medicare & Medicaid Services (CMS). Understanding Hospitals’ Numerous Revenue StreamsPayments for patient care services are often the focus of hospital cost discussions, but they only represent one revenue stream for most health systems. When addressing hospital costs, payers should understand and consider that hospitals have multiple sources of revenue.  States and other payers can use the Hospital Cost Tool to understand a hospital’s many revenue sources as they seek to understand and address hospital costs. What Is Breakeven?Commercial breakeven is the reimbursement rate a hospital needs to receive from commercial payers to cover all of its expenses for hospital inpatient and outpatient services, without profit. It includes revenue from all sources, commercial patient hospital costs, as well as shortfall or profit from public coverage programs, Medicare disallowed costs, and other expenses, such as hospital operations, administration, ancillary services, and non-operating expenses. States and other payers can use NASHP’s Hospital Cost Tool to compare a hospital’s commercial breakeven to its RAND 3.0 commercial price — how much a hospital was reimbursed by commercial payers in aggregate from 2016 to 2018 (calculated using data from the RAND Corporation’s Nationwide Evaluation of Health Care Prices Paid by Private Health Plans). The tool expresses commercial breakeven and price as multiples of Medicare rates for comparability. Understanding the difference between these data points highlights the opportunity for payers to negotiate with hospitals to help contain costs. Factors That May Impact Breakeven Include:Medicare payment rate — A hospital’s breakeven is based on its own Medicare reimbursement rates. If a hospital is paid by Medicare in excess of its Medicare-related expenses, breakeven would be lower. Hospital other income — If a hospital receives significant other income (e.g., return on investments, federal relief payments), the payment required from a commercial payer would be lower. Reimbursement from other payers — If the hospital generates payer mix adjusted profits from other payers (e.g., Medicaid, Medicare, CHIP and other local/state programs, Medicare Advantage), the payment required from a commercial payer would be lower. Reporting error — MCRs are completed by the hospital or their contractor and may contain reporting errors, impacting breakeven calculations. Uncovering the AnswersA hospital’s expenses are based on multiple factors, which are further broken down in the Hospital Cost Tool. The state’s health care market is one factor, but a hospital’s location doesn’t necessarily dictate its expenses or prices. The charts below show how six hospitals in one county have varying commercial breakevens and prices, even though they operate in the same area — as well as some questions to ask about their breakevens. Could hospitals cover their expenses with lower commercial prices? Why are the prices at Hospitals 1 and 2 so much higher than their breakevens, relative to the other hospitals? System A is one the largest health systems in the state and owns the highest proportion of beds in the county. A body of evidence suggests that hospitals/ systems with a higher market share also have higher prices. Are the breakevens and prices at Hospitals 3 and 4 “normal” compared to hospitals outside this county? NASHP’s Hospital Cost Tool allows users to compare a hospital to state and national medians. Comparing Hospital 3 to its national peers:
Comparing Hospital 4 to its national peers:
Why are the prices at Hospitals 5 and 6 lower than their breakevens? Hospital 5 and other governmental hospitals may have expenses that for-profit or nonprofit hospitals do not. For example, its expenses include state retiree benefits. As a teaching hospital, it may also maintain specialty services (e.g., maternity ward) that other hospitals do not. Breakeven can reflect a hospital’s efficiency, with a relatively inefficient hospital (i.e., a hospital that performs poorly on cost and quality metrics) having a relatively high breakeven. Additionally, as a relatively small, independent hospital, Hospital 6 has less market power than the larger systems when negotiating prices with commercial payers. How is breakBreakeven analysis provides insight to relationships between price, fixed costs, variable costs and volume. When combined with the contribution-margin approach, breakeven analysis can provide the answers to key questions that form the basis of many decisions facing health-care professionals and managers.
What is the process of conducting the breakTo calculate break-even point based on units: Divide fixed costs by the revenue per unit minus the variable cost per unit. The fixed costs are those that do not change regardless of units are sold. The revenue is the price for which you're selling the product minus the variable costs, like labour and materials.
What factors need to be considered when considering your breakEssentially breakeven is determined by two basic factors -- anticipated revenue and projects costs of doing business. Revenue is largely affected by market demand. The more customers desire your products and services, the greater your sales volume and the sooner you can cover your business costs.
What are the three components of breakThe break-even analysis is used to examine the relation between the fixed cost, variable cost, and revenue.
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