Merry J.

McBryde-Foster

Break-Even Analysis in a Nurse-Managed Center

Executive Summary
While nurse-managed centers have proven effective in providing lower cost care than physician-managed centers, they have often failed due to inadequate reimbursement mechanisms, low patient volumes, and/or poor business management. The author outlines the steps necessary to perform a basic break-even analysis of an ambulatory center for the dual purpose of evaluating future feasibility and managing daily operations. The analysis utilizes estimates of fixed and variable costs as well as visit charge and visit volume. A weighted contribution margin is also discussed as a means to accurately depict reimbursement based upon factors such as payer mix and visit complexity. By manipulating variables in the equation, a manager can better visualize opportunities to reduce fixed cost, move fixed costs to variable costs, increase volume, or improve contribution margin in order to maintain fiscal stability.

a national crisis with rising uninsured populations, shrinking payer resources, unknown error rates, and rising external controls. Rationing of health care, the newest strategy to contain costs, is manifesting itself in major health care settings. Cash up-front and health savings accounts will soon surprise a growing number of consumers no longer shielded from the true price of health care. The solution to this crisis must certainly be a multi-professional one. Nurse-managed centers have much to offer toward resolving the crisis. However, without the ability to maintain fiscal sustainability, nurse-managed centers may fail to exercise their full potential for positively influencing the future. Many academic settings have developed nurse-managed practice arrangements to support student learning, provide for faculty practice, and improve preventative care and health promotion for underserved populations. These are worthy motivations, but without the capability for strong financial management, many of these centers will have difficulty remaining open. Above all others, academic nurse-managed centers

ODAY, HEALTH CARE IS FACING

are responsible for teaching methods to measure and achieve fiscal responsibility. Financial sustainability is cited in the literature as a major weakness of nurse-managed centers (Barger, 1995; Saywell, Lassiter, & Flynn, 1995). The need for fiscal management, however, is not a new idea. Kos and Rothberg (1981) designed program evaluation methods for a freestanding nurse clinic start-up project that included a measurement of cost effectiveness. Finding financial evaluation a very elusive and difficult process, the authors suggested more development was needed in data documentation and retrieval. The recent work by the Michigan Academic Consortium (Vonderheid, Pohl, Barkauskas, Gift, & Hughes-Cromwick, 2003) points out that academic nursemanaged centers need to improve their ability to measure fiscal outcomes. The work through the consortium isolated a set of financial outcomes useful to guide financial

MERRY J. McBRYDE-FOSTER, PhD, CCM, RN, is an Assistant Professor, Louise Herrington School of Nursing, Baylor University, Dallas, TX.

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Figure 1. Relationship Between Fixed and Variable Costs E

Figure 2. Break-Even Analysis Formula

FC Q= P - VC

C Dollars F

evaluation and called for studies to determine financial performance measures and related operating practices with the goal of identifying benchmarks (p. 168). To carry out such studies, nursing faculty need a set of tools to perform financial assessment.

Break-Even Analysis
D G Volume of Center Visits

Figure 3. Sample Break-Even Analysis for a Proposed Nurse-Managed Center Fixed Costs Staff salaries and benefits Faculty practice salaries and benefits Equipment purchases Contracts for pharmacist and medical director Rent $158,750.00 84,000.00 27,800.00 17,000.00 12,000.00 Sub-total $299,550.00 Variable Costs Supplies purchased Supplies donated Medications and chemicals Consultant evaluations $15,200.00 25,000.00 4,800.00 6,500.00 Sub-total $51,500.00 Average price per visit = $60.50 Estimated annual visit volume = 4,250 visits Variable cost per visit = $51,500/4,250 = $12.12/visit Break-Even Analysis Calculation: Quantity = Fixed costs/Price - Variable costs per visit Quantity of Visits = $299,550/$60.50-$3.22 = 299,550/$48.38 = 6191.6 or ,6192 visits

Uses. Break-even analysis (BEA) is one tool useful in analyzing business decisions (Hammel & Goulet, 1989). Forecast information about the likely volume of the service can be compared with break-even volume to predict whether there will be profits or losses (Finkler & Kovner, 2000, pp. 143-144). Pelfrey (1990) further suggests that this technique can be used to control costs, identify programs that are not performing well, or to evaluate the feasibility of potential projects. The BEA process requires the quantification of fixed and variable costs in order to identify the price of products and services or to determine the volume of services needed to break even financially. According to Finkler and Kovner (2000), break-even analysis is focused on using cost information for understanding whether a particular unit or service will lose money, make money, or just break even (p. 143). If BEA is used in the planning stage of a nurse-managed center, it can help to predict the number and type of visits required to sustain the center. The concept. Figure 1 illustrates the relationship between fixed and variable costs, basic parts of the concept of BEA. The vertical axis of the diagram represents the cost of maintaining the clinic in dollars. The horizontal

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Table 1. Weighted Contribution Margin by CPT Code Price Contribution Margin ( ) = loss Weight Contribution Margin

Visit CPT Code New Patient 99201 99202 99203 99204 99205 Existing Patient 99211 99212 99213 99214 99215

Visit Price

Variable Cost per Visit

Percentage of Visits

$30 45 65 80 90 20 40 50 75 110

$35* 20 30 32 40 22 20 25 35 40

($5) 25 35 48 50 (2) 20 25 40 70

10% 11 9 14 10 10 9 8 10 12

(0.5) 2.75 3.15 6.75 5.0 (0.2) 1.8 2.0 4.0 8.4 32.90

*Figures are for demonstration purposes only and do not reflect actual data. Recalculation of the formula using the total contribution margin: Q = FC/P-VC = FC/CM = $299,550/32.90 = 9105 visits needed to break even

axis represents the volume of patients seen in visits. The fixed costs are represented by line A-B. Notice that the fixed costs do not change regardless of whether one visit or many visits are performed in the center. The variable costs are represented by line A-C. Variable costs are constant per visit type, but as the volume of visits rise, the variable costs multiply. The C point represents total cost in dollars; total is the sum of all fixed cost and variable costs. The revenue, compared to total cost, is represented by line D-E. Only at point F does the revenue exceed costs. Once these representations are plotted on the graph, the break-even point, represented by line F-G, becomes visible. At the F-G volume of visits, the center begins to make a profit. The BEA technique is based on a simple formula illustrated in Figure 2 where (a) the quantity (Q) of services is visits, (b) the fixed

costs (FC) are those that must be incurred regardless of the number of visits, (c) the variable costs (VC) are those consumed during visits, and (d) the price (P) is what is charged for a visit. This formula can be used to determine price (P) or quantity (Q) of services.

Application in a Nurse-Managed Center

An example of the BEA for a fictitious nurse-managed center is provided in Figure 3. The calculations are based on a 1-year period and include all donated costs. Center staff salaries and benefits are budgeted at $158,750. Faculty salaries donated to the clinic by the school of nursing are promised at a cost of $84,000. Equipment purchases are projected at $27,800 and consultant contracts for pharmacy and medical quality control will cost $17,000. Rent will be $1,000 per month. The sum of the fixed costs total $299,550.

Next, total variable costs must be calculated. An estimated $15,200 is needed to purchase supplies. Donated supplies are estimated to be $25,000; another $4,800 is allotted to purchase medications and chemicals. Consultant fees for referrals are expected to be $6,500. The sum of the variable costs is $51,500. In preparing the proposal for the center, the price of an average visit is determined to be $60.50. This price will be used to determine the variable cost per visit. The center is estimated to perform 4,250 visits in the first year of operation. The projected variable costs total is divided by the expected volume of visits, and yields a cost of $12.12 per individual visit. Entering all items in the formula, the BEA in Q units is calculated to be 6,192 visits. It is this quantity of visits that is needed for the center to break even. More visits

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would be needed to make a profit. At this point the planners of the project must decide the likelihood that the center will be able to handle the number of required visits per day at the Q volume of 6,192 and the likelihood that the area population can yield the required number of visits. To further evaluate the total annual visit requirement, the number of visits per day should be examined. Using the estimation of 22 working days per month, the center can be considered to operate 264 days in the year. The total visits divided by the number of total working days results in the need for the center to accomplish 23 visits per day. If only one practitioner is available each day and spends an hour per visit, it can readily be seen that the center will not be profitable. In addition, if the population of the service area is not large enough to provide the volume of paid visits needed to break even, the project has an even greater chance of failure. Another consideration in estimating break-even points in a nurse-managed center is that prices for visits will vary according to the type of visit billed. The variable costs of visits will vary according to the type of visit. Each visit type could have a different value above the variable cost. Finkler and Kovner (2000) define this difference as the contribution margin (CM), the amount by which the price exceeds the variable cost (p. 489). If the contribution margin is positive, each visit will add to the potential for making a profit. Table 1 illustrates the contribution margin for each type of visit by Current Procedural Terminology (CPT) codes. Since the overall contribution margin must be a positive number to cover costs and influence making a profit, center planners will do well to consider the potential reimbursement issues while examining fixed and variable costs. The price for visits, usually set higher than reimbursement

expectations, must also be a price that self-paying patients can afford to pay. Table 1 displays the CPT codes for new and existing patient visits. The contribution margin is figured for each visit type by the formula: PVC=CM. Column four in the table lists the calculated contribution margin for each visit type. The weighted contribution margin, presented in column six, is calculated by multiplying the contribution margin by the percentage of visits expected for each specific CPT code. The weighted contribution margins of each visit type can be summed and used in the break-even analysis formula in place of the denominator. The example shows the weighted contribution margin to be $32.90. Table 1 concludes with the calculation of the revised formula. Using the weighted contribution margin allows the center planners to see a more accurate estimate of visits needed for the center to break even. Visits needed by this approach are 9,105, more than previously estimated. Considering the weighted contribution margins illustrated another advantage in using breakeven analysis to evaluate a proposed nurse-managed center. Besides presenting a more accurate picture of the number and types of reimbursed visits needed to break even, these calculations require the planners to think about costs and the type of financial data that must be tracked during operation. Collection of real data can then be studied more formally.

applied in evaluating a proposal for a nurse-managed center. The advantages of using break-even analysis in developing a proposal for initiating academic approval and grant application are explored.$
REFERENCES Barger, S. (1995). Establishing a nursing center: Learning from the literature and the experiences of others. Journal of Professional Nursing, 11(4), 203212. Finkler, S., & Kovner, C. (2000). Financial management for nurse managers and executives. Philadelphia: W.B. Saunders Company. Hammel, F., & Goulet, P. (1989). Breakeven analysis: A decision-making tool. U.S. Washington, DC: Small Business Administration, Office of Business Development. Kos, B., & Rothberg, J. (1981). Evaluation of a free-standing nurse clinic. In L. Aiken (Ed.), Health policy and nursing practice. New York: McGraw-Hill Book Company. Pelfrey, S. (1990). Cost categories, behavior patterns, and break-even analysis. Journal of Nursing Administration, 20(12), 10-14. Saywell, R., Lassiter, W., & Flynn, B. (1995). A cost analysis of nurse-managed, voluntary community health clinic. Journal of Nursing Administration, 25(10), 17-27. Vonderheid, S., Pohl, J., Barkauskas, V., Gift, D., & Hughes-Cromwick, P. (2003). Financial performance of academic nurse-managed primary care centers. Nursing Economic$, 21(4), 167-175.

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Summary
Break-even analysis is one of the financial assessment tools available to advanced practice nurses in evaluating the feasibility of opening a nurse-managed center. The concept of break-even analysis is herein defined and the formula and the data needed to calculate this financial measure is reviewed. The technique is

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