An equipment acquisition proposal was being considered by a large health care or
ID: 470158 • Letter: A
Question
An equipment acquisition proposal was being considered by a large health care organization. The array machine will enable the hospital to perform autoimmunity tests (for immunoglobulins G, M, and A and complements C3 and C4) in-house rather than sending them to a reference laboratory. Test turnaround time is expected to decrease by 2 days. The array machine costs $50,000, with a useful life of 5 years. The depreciation schedule will be $10,000/year. The expected volume for tests is one of each of the five autoimmunity tests per day. Having the tests done by the reference laboratory costs the hospital an average of $10/test. The hospital's average charge to patients is $20/test. If the array machine is acquired and the tests done in-house, the costs of reagents would average $2/test. The array machine can run a maximum of 40 patient samples and perform 20 different tests on each sample every 2 hours. Except in extraordinary circumstances, tests would be run Monday thorough Saturday. The machine requires approximately 1 hour of technician time (valued at $15/hour# each day to calibrate it, to conduct a test run for control purposes and to perform general maintenance. This is a fixed cost because it does not vary by volume. Technician setup time to run tests is negligible. Beyond the five autoimmunity tests the laboratory wants to perform in-house, the machine can also perform apolipoprotein cardiac profiles that are currently done on equipment in the clinical chemistry department. The array machine can provide a quantitative measure and not just the positive or negative indicator that the clinical chemistry department's current equipment gives. 3. If half of the patients have Medicare coverage #DRG reimbursement includes all tests), would the laboratory break even on the equipment? If not, should the equipment be acquired anyway? The response should provide a rationale and discussion regarding each step you take and please include all of the formula used on a excel spreadsheet? Please....
Explanation / Answer
Total Fixed Cost (T) = $50,000
Variable Cost Per Unit (V) = $2.00 - Reagent costs
Sales Price Per Unit (P) = $20.00
Break Even Point in Units
B (units) = F / (P – V)
= $50,000 / (20-2)
= $50,000 / 18
= 2777.7 or 2778 Units
Break Even Point in Dollars
B = B (Units) * P
= 2,778 * 20
= $55,556
This shows that the hospital will have to perform 2,778 tests to reach the Break Even amount of $55,556. If the Break Even point was based on the total cost of the equipment figured over its life span, then the total annual fixed cost would be $10,000 per year.
Net Contribution
Net revenue of off site lab - 1560 * 10 = $15600
Net revenue to array - 10,000 * 2 - 360 - 1560 = $18,080
If the array were to be purchased it would contribute and average net gain of $2,480.00 per year based on current operations.
The purchase of the array machine that the hospitals revenue could vary based on the payments made by Medicare. Although DRG reimbursement includes all tests, the calculations above show what some current payouts from Medicare on test would be and how it would affects the revenue based on the annual average test that are performed. If Medicare covered 74% of the test, the revenue changes from $18,080.00 a year at full pay to $13,379.20 per year. This could mean a difference of $4,700.80 in revenue.
Details Array off site lab Test per year 1560 1560 Variable cost (Reagents) $2 - Test charges to patient $20 $20 Annual fixed costs (5 years) $10,000 - Cost of per laboratory test - $10 Net revenue 18,080 $15,600 Net per year to add array 18080 - 15600 = $2480