There are various advantages of cost volume profit analysis which medical or health care industry can exploit to become more efficient at analyzing different levels of activity. It can then use the optimal activity level to increase its profitability. Hence we can say that cost volume profit analysis can be used to enhance the profitability of the health care industry. A medical company which is diversified in various different operation or have different departments can use it to see if operating on a large scale will be more efficient and whether or not it is worth putting more time and effort into the business. Similarly, there are chances that fixed are less than variable costs for a department. However, this will be only visible after CVP analysis, whether or not we can start a new department, it is feasible or not. Hence, a medical company will have to use CVP analysis to look at the profitability of a new department if they plan to diversify its services. As we know that modern machinery is pervading the health care industry, a lot of investment needs to be done. Hence, this implies long-term commitment with specialized labor (doctors, surgeon, support staff etc) which means heavy burden of costs on a firm. However, CVP analysis is a toll that can be used by these firms to assess how long it will be before they will be able to cover their costs and start making profit. This is important when you have more than one alternative, and you look CVP to choose the best option, where cost recovery is fast and profit-making potential is highest. Similarly, there are various assumptions that we have to make when we go about doing CVP analysis. One such assumption is that fixed remain constant. This may not be true, but it is easier for managers in the field of health care to plan ahead, and as discussed above, it may help them to choose the best alternative. Machinery improves efficiency, and medical-service managers can use it to convince their manager or investor to attract investment by showing them CVP results.
Capitation is a fixed flat payment made to a health-care services provider for providing service to a particular segment or defined population. These payments are made on per capita basis that is calculation is done on per-person basis and are made monthly or as the contract states. The three most widely used methods of capitation are fee-for-service, cost and demographic approach.
In the fee-for-service approach, the revenue line is mostly upward sloping. It starts from zero as when there is zero level of activity, there is no revenue for the health-care service provider, but it goes up with the level of activity. The higher the number of people to whom service is provided, the greater the revenue.
In the cost approach, rather than a fixed fee is charged, the company charges total costs that are incurred in providing health care services, and then that fee is charged to the client. This approach can be referred as "pay for all approach and was very common in traditional capitation payments.
In demographic capitation, pharmacists are only responsible or contract to provide their services to people of specific age, gender and geographic location. This is done to buffer them from unexpected disease found in particular demographic group and to make sure that they do not suffer as a