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You have been hired as a consultant to recommend a fixed reimbursement amount (the base rate) to propose during the contract negotiations for Phase 4 hospital services. To help in the analysis, the administrative director has indicated that approximately 60 percent of nursing, ancillary, operating room, and laboratory costs are fixed. The remaining costsradiology, drug, and other servicesare predominantly variable. Furthermore, current payers are reimbursing the hospital at roughly $140,000 for Phase 4 services.

The Center has sufficient capacity to handle about 30 more transplants before fixed costs would increase by a meaningful amount. If marginal volume exceeds 30 transplants, the best estimate is that fixed costs would increase somewhere between 15 and 25 percent.

a) What is the estimate of the marginal cost of the Phase 4 hospital services? (Assume, as given in the case, that 60 percent of the designated costs are fixed and the remaining costs are variable.) b) Create the underlying cost structure (cost behavior) equation. What is the relevant range for this structure? Does the structure change if the contract is expected to bring more than 30 additional transplant patients? c) What fixed-cost proportion is required to force the average variable cost for Phase 4 hospital services to be $90,000?

LOS length of stay: OR cperating rocm

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