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Break-Even Analysis in Health Care: Understanding Revenue vs. Costs

Discover how Break-Even Analysis helps determine service volume required for revenue to surpass costs in health care settings. Learn the Basic Linear Model and explore revenue and cost dynamics.

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Break-Even Analysis in Health Care: Understanding Revenue vs. Costs

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  1. Useful EXCEL Functions

  2. Break-Even Analysis • Break even analysis determines the volume of service needed to ensure that revenue generated will exceed costs. • Applications in health care • Basic Model • Revenue growths with increasing service volume • Total cost growths with increasing service volume but at a slower rate than revenue

  3. Break-Even Analysis • The break-even point is the level of service volume at which total revenues equal total costs. • A service volume higher than the break-even point implies that revenues exceed costs.

  4. Break-Even Analysis • Basic Linear Model • Total Revenue = Unit-revenue x Service volume TR = REV x N • Total Costs = Fixed Cost + Variable Cost TC = FC + VC • Variable Cost = Unit-cost x Service volume VC = COST x N

  5. Break-Even Analysis Basic Linear Model • Fixed costs are those that are incurred regardless of how much service is provided. • Variable costs are items of expense that relate to the direct cost of providing care and are expressed as costs per unit of service delivered.

  6. Break-Even Analysis • Solution to the Basic Linear Model TR = REV x N TC = FC + VC VC = COST x N Want to find N* for which TR = TC • N* = FC/(REV - COST)

  7. Break-Even Analysis Case Problem - (A) p. 21

  8. Break-Even Analysis Solution to the Case Problem

  9. Break-Even Analysis What-If Analysis

  10. Break-Even Analysis Model Variations

  11. Break-Even Analysis Model Variations

  12. Break-Even Analysis Model Variations

  13. Break-Even Analysis Sensitivity Analysis with Two-input Data Tables

  14. Break-Even Analysis Sensitivity Analysis with Two-input Data Tables

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