Essentials Of Cost Accounting For Health Care Organizations 3rd Edition by Steven Finkler, David Ward,Judith Baker

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Your organization (City Rehab) has been approached by an MCO looking for an exclusive arrangement for the rehabilitation of its hip replacement patients. The MCO is aggressively positioning itself to compete in the growing Medicare managed care segment. They have offered to guarantee 1000 patient visits per year and want to pay $70 per visit. City Rehab currently receives $95 per visit directly from Medicare. City Rehab provides 1,500 hip replacement visits per year and has the capacity to handle 500 more easily without adding any staff or equipment. The fixed costs associated with hip replacement rehab are $7,500 and the variable costs are $67 per visit.
a. What is City's current average cost per hip replacement visit?
b. Should you take the MCO's offer? If so, why? If not, why not?
c. What if the MCO wanted to pay City a flat amount ($4) for each of its 10,000 Medicare covered lives, regardless of how many patients/visits ultimately came in for hip replacement rehabilitation (capitation). What additional information would you need to determine whether or not City Rehab should go ahead with this deal?