In this assessment, you will evaluate the physicians’ practice financial condition based on the following Relative Value Unit (RVU) calculations and analysis:
You will be graded based on your understanding of the calculations, the accuracy of your calculations, the validity of your conclusions and your ability to clearly communicate your analysis. To complete this assignment, follow these steps:
Average and Marginal Costs per RVU,
Calculate the costs,
Show your calculations, and
Write a conclusion about the physician practice’s financial condition and discuss how you can assist the physicians in using these costs in making informed decisions.
*Please use headings for each paragraph and category to decipher the discussion and organize the paragraphs.
Use the following assumptions:
Assume that during the FY2016 year, Lovely Life LLC historical costs were
$750,000
when
11,000
RVUs were produced and
$950,000
when
14,000
RVUs were produced. The contract specifies that the number of RVUs per service CPT code are five (5).
High Total Fixed Costs
$950,000
#RVUs high point
14,000
Low Total Fixed Costs
$750,000
#RVUs low point
11,000
#RVUs per CPT
5
Projected #RVUs for the coming month
10,000
Sample Physician RVU analysis.
To carry out an analysis of costs, the management accountant must first calculate the average and marginal
costs per RVU. With the number of RVUs required by the contract per CPT code known, a management
accountant can calculate the total average cost and the total marginal cost per CPT code. He or she can use
this information to help the physicians make informed decisions.
Example of Calculations
Assume that during 2016, XYZ P.C.s costs were historical $672,000 when 10,000 RVUs were produced and $782,000 when 12,000 RVUs were produced.
Step 1.
a) Calculate the average and marginal costs per RVU.
Y2 – Y1 = $782,000 – $672,000 = $110,000
X2 – X1 = 12,000 RVUs – 10,000 RVUs = 2,000 RVUs
b) Calculate the variable cost per unit
Cost difference divided by production difference =
$110,000 ÷ 2,000 RVUs = $55 per RVU
c) Calculate the total fixed costs.
Fixed Costs = $782,000 – ($55 * 12,000 RVUs)
= $782,000 – $660,000 = $122,000
d) Calculate total costs
Total fixed costs + (variable cost per RVU times number of RVUs).
Total = $122,000 + ($55 * 12,000 RVUs)
=$122,000 + 660,000 = $782,000
e) Calculate average cost per RVU
The average cost per relative value unit is determined using the projected number of RVUs for the
coming month in the above formula. For example, if during the coming month it is expected that the practice will generate 11,000 RVUs, the average cost would be as follows:
Average cost per RVU = {$122,000 + ($55)(11,000)} ÷ 11,000 RVUs = $66.09 per RVU.
The marginal cost per RVU is simply the variable costs or $55.00 per RVU.
Step 2. Determine the number of RVUs required by the contract per CPT code:
For example, the contract may state that a particular CPT code allows six RVUs.
Step 3. Calculate the total average cost and the total marginal cost per CPT code.
The cost per procedure is the cost per RVU times the number of relative value units allowed per procedure.
For example, if a procedure allows six RVUs then the average cost for the procedure would be 6 * $66.09 =
$396.55, and the marginal costs would be 6 * $55 = $330.00.
Step 4. Assist the physicians in using these costs appropriately to make informed decisions.
The management accountant can help the physician group make informed financial decisions about potential
contracts. The nature of the decision will depend on whether it is a PPO or HMO contract under consideration.
