CASE 9 QUESTIONS
BOSTON TRANSPLANT CENTER
Marginal Cost Pricing Analysis
1. What is the marginal cost estimate of the Phase 4 hospital services, assuming that 60 percent of the designated costs are fixed and the remaining costs are variable? 2. Create the relevant underlying cost structure (cost behavior) equation. What is the relevant range for this structure? How does the structure change if the contract is expected to bring more than 30 additional transplant ...view middle of the document...
Now assume that the fixed cost proportion is only 50 percent. What price must be set to cover variable costs? What if the fixed cost proportion is 70 percent? 5. How does the result change if the contract requires new fixed costs in addition to variable costs? Assume, regardless of incremental volume, that fixed costs increase by 10 percent if the contract is undertaken. Now assume 20 percent. What fixed cost increase is implied if the price for Phase 4 hospital services is set at $90,000? 6. What role do the following factors play in the decision as to whether to use marginal cost pricing on the new contract? a. Reimbursement amounts paid by current transplant third-party payers b. The amount of excess capacity in the transplant unit 7. What is your final recommendation regarding the base rate for Phase 4 hospital services that should be built into the contract? When answering this question, be sure to consider (1) a longterm pricing strategy and (2) the impact of the contract on current payers, who are paying roughly $140,000 for the services. 8. Now consider the outlier problem. a. What methodology should be used to handle outlier reimbursement? b. What threshold amount should be included in the contract? c. What payment amount should be included after the threshold is reached?