Health Care Accounting

Prepare a formal and comprehensive response to Dr. Barkley that demonstrates an understanding of the Week Three objectives. 
• Explain the relevance of Diagnosis Related Groups (DRG) analysis as a tool that drives costs and affects management decisions in health care.
• Calculate the breakeven points, in numbers of treatments, for each type of DRG, using the weighted average contribution margin approach.
• Propose recommendations that answer the following questions:
o Which DRG must be promoted in an advertising program if the office has excess capacity? Explain why.
o Which DRG must be promoted if the office is almost at maximum capacity in terms of available hours? Explain why.
o What rationale may be used to support the use of DRGs as an approach to allocating costs?
Getwell Clinics Breakeven Analysis
The Beach Street office of Getwell Clinics specializes in the treatment of three types of patients: DRG M, DRG J, and DRG P. The operating statistics for patient care of these three DRGs for last year are shown below. They include patient volume proportions, average charges, average variable costs, and the amount of specific fixed costs assignable to each DRG. In addition, the satellite office had joint fixed costs last year of $390,000.
Getwell Clinics Operating Statistics
DRG Proportion Charge Variable Cost Fixed Cost
M 45% $2,000 $1,000 $850,000
J 30% 3,000 1,500 800,000
P 25% 1,200 300 100,000
Joint Fixed Costs 1,560,000
100% $3,310,000
Doctor Barkley, newly appointed director of the satellite office, has requested that you determine the breakeven points for each DRG. Dr. Barkley also wants to know which DRG would be the most profitable to promote in growing the practice. A recent time study showed that procedures involved in each DRG took the following time: DRG M, 3 hours; DRG J, 4 hours; and DRG P, 1 hour