HPI4007 – Financial Management of Healthcare Organizations
Training cost analysis session 1 – cost types and cost calculation
Case 1: costs and net results
Introduction to theory: the management of a healthcare organization is often concerned with the
expected costs, expenses and revenues, as well as with the expected financial result of the
organization. The discussion of future unit cost-price and required tariff (or market price) is a typical
task of a healthcare manager. For clarity, we define the financial management terms mentioned:
- Unit cost-price is the monetary value of all inputs (resources) that are necessary for the
production/delivery of one unit (one service or one product).
- Market price is the amount of money that the organization receives for one product or one
service delivered. A manager will be interested in selling products/services at a market price
that is higher than the unit cost-price.
- Tariff (also called fee) has the same meaning as market price but the key difference is that in
contrast to market prices, tariffs (fees) are usually set by the insurer/government.
- Total costs are defined as the sum of all different types of costs that are necessary for the
production/delivery process.
- Total revenue is the total amount of money that the organization receives for selling a
certain number of products or for delivering a certain amount of services.
Total costs can consist of many different cost components. For simplicity we only make a distinction
between fixed and variable costs. The level of fixed costs is not affected by the production quantity.
Even when there is no production (no service delivery), there would still be fixed costs (e.g. costs of
building, wages, etc.). In contrast, variable costs directly depend on the production quantity (see
Figure 1.1.).
It is necessary to know the total costs and total revenues for a given period, to be able to estimate
the expected net financial result of the organization for that period. We will use the following
formulas for total costs, total revenue, and net result:
- Total costs = total variable costs + total fixed costs = variable costs per unit * quantity + total
fixed costs
- Total revenue = market price per unit * quantity = fee per unit * quantity
- Net financial result = total revenue - total costs
If the net financial result is negative (< 0), we have loss, if the net financial result is positive (> 0), we
have profit, and if the net financial result is zero, we have a break-even point.
We assume a homogenous production output (e.g. services delivered are accepted to be similar).
Therefore, we will apply the following formula for unit cost-price:
- Unit cost-price = total costs / quantity
, Exercise
See document on
the student portal
for the answers.
Training cost analysis session 2: decisions under uncertainty and break-even analysis
Case 1: break-even analysis of a new pharmaceutical product
Introduction to theory: the future development and expansion of the healthcare organizations often
require decisions about an adequate investment in new healthcare equipment and staff. However,
the future is uncertain and the uncertainty in the decision-making process generates risk. Break-even
analysis is one useful and relatively simple tool for management decision-making under uncertainty.
It can help managers to establish production levels that can balance costs and revenues (see Figure
1.1.).
The following basic equations are used to analyse the break-even quantity:
- Break-even situation: total costs = total revenue
- Total costs = total fixed costs + variable costs per unit * quantity
- Total revenue = market price per unit * quantity = fee per unit * quantity
The break-even quantity is:
- Quantitybe = total fixed costs / contribution margin
- Contribution margin = market price per unit - variable cost per unit = fee per unit - variable
costs per unit
Training cost analysis session 1 – cost types and cost calculation
Case 1: costs and net results
Introduction to theory: the management of a healthcare organization is often concerned with the
expected costs, expenses and revenues, as well as with the expected financial result of the
organization. The discussion of future unit cost-price and required tariff (or market price) is a typical
task of a healthcare manager. For clarity, we define the financial management terms mentioned:
- Unit cost-price is the monetary value of all inputs (resources) that are necessary for the
production/delivery of one unit (one service or one product).
- Market price is the amount of money that the organization receives for one product or one
service delivered. A manager will be interested in selling products/services at a market price
that is higher than the unit cost-price.
- Tariff (also called fee) has the same meaning as market price but the key difference is that in
contrast to market prices, tariffs (fees) are usually set by the insurer/government.
- Total costs are defined as the sum of all different types of costs that are necessary for the
production/delivery process.
- Total revenue is the total amount of money that the organization receives for selling a
certain number of products or for delivering a certain amount of services.
Total costs can consist of many different cost components. For simplicity we only make a distinction
between fixed and variable costs. The level of fixed costs is not affected by the production quantity.
Even when there is no production (no service delivery), there would still be fixed costs (e.g. costs of
building, wages, etc.). In contrast, variable costs directly depend on the production quantity (see
Figure 1.1.).
It is necessary to know the total costs and total revenues for a given period, to be able to estimate
the expected net financial result of the organization for that period. We will use the following
formulas for total costs, total revenue, and net result:
- Total costs = total variable costs + total fixed costs = variable costs per unit * quantity + total
fixed costs
- Total revenue = market price per unit * quantity = fee per unit * quantity
- Net financial result = total revenue - total costs
If the net financial result is negative (< 0), we have loss, if the net financial result is positive (> 0), we
have profit, and if the net financial result is zero, we have a break-even point.
We assume a homogenous production output (e.g. services delivered are accepted to be similar).
Therefore, we will apply the following formula for unit cost-price:
- Unit cost-price = total costs / quantity
, Exercise
See document on
the student portal
for the answers.
Training cost analysis session 2: decisions under uncertainty and break-even analysis
Case 1: break-even analysis of a new pharmaceutical product
Introduction to theory: the future development and expansion of the healthcare organizations often
require decisions about an adequate investment in new healthcare equipment and staff. However,
the future is uncertain and the uncertainty in the decision-making process generates risk. Break-even
analysis is one useful and relatively simple tool for management decision-making under uncertainty.
It can help managers to establish production levels that can balance costs and revenues (see Figure
1.1.).
The following basic equations are used to analyse the break-even quantity:
- Break-even situation: total costs = total revenue
- Total costs = total fixed costs + variable costs per unit * quantity
- Total revenue = market price per unit * quantity = fee per unit * quantity
The break-even quantity is:
- Quantitybe = total fixed costs / contribution margin
- Contribution margin = market price per unit - variable cost per unit = fee per unit - variable
costs per unit
