DRG Patient Classification - Essay Example

Breakeven Analysis Sales variable cost fixed cost Allocation JFC Total FC Breakeven units HR gross margin DRG M 1700 1000 500,000 415000 915,000 1307 2 41.18% DRG J 2600 1200 280,000 249000 529,000 378 5 53.85% DRG P 900 600 110,000 166000 276,000 920 1 33.33% Total 890,000 830000 1,720,000 The company has three different DRG type patients to which the firm provides its health service. The three different types of patients generate various types of revenues streams. The DRG J patients generate $2600 in treatment cost which is the highest revenue figure among the three types of patients.

The DRG J patients also have the highest contribution margin at $1400, but also the highest profit margin at 53.85%. One of the negative aspects about the treatment of DRG J patients is that it takes company 5 hours to complete a treatment session for these patients. Time consuming patients limit the ability of the clinic to have high patient turnover. Fewer patients are served each month when a clinic has to spend 5 hours in DRG J patients instead of the two hours and one hour its takes to serve DRG M and DRG P type patients.

The DRG P patients have the lowest patient charge at $900. The good aspect of treating the DRG P patients is that the clinic only has to consume one hour of time to serve them. The DRG M patients generate the Beach Street office of Getwell Clinics a profit margin of 41.18%. These types of patient generate an average patient charge of $1700. The breakeven point in number of treatments varies by DRG type patient. The patients that have the highest breakeven point in terms of number of treatments are the DRG M patients.

The reason that the breakeven point for DRG M patients is so high is because the total fixed cost for these patients is $915,000. The contribution margin for each patient is $700. The patient type that has the lowest breakeven points is the DRG J patients at 378 treatments. The high contribution margin of $1400 and the lower total fixed cost are factor that led to the DRG J patients having the lowest breakeven point. The DRG P patients have a contribution margin of $300 and breakeven point in terms of 920 treatments.

Despite having a low contribution margin the DRG P patients had the lowest total fixed cost at $276,000. `When companies have excess capacity they should use that production opportunity on the service or product that provides the greatest profitability which optimizes the use of the resources of the firm. The DRG patient type that provides the highest profitability for the clinic evidenced by its higher contribution margin and profit margin is the DRG J. An advertising program should target the DRG J patients because the treatment given to these patients generate more revenues than any other DRG patient type.

The results generated by an advertising campaign can be measured in terms of how many more patients visited the clinic after the ads are run on television, radio, written press, or on the internet. Due to the fact that each DRG J patients bring to the clinic greater revenues per visit than any other patient these patients must be targeted more aggressively by the firm. Based on the scenario that the clinic is at maximum capacity in terms of hours the firm should concentrate its efforts on completing work orders that can be achieved in the fastest time possible.

The DRG patient time that requires the least amount of time to complete a treatment is the