Breakeven Modeling for a Multimodality Imaging Center

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In the 1980s and 1990s, payor fees were generous for the newest modalities, and most freestanding imaging facilities were quite profitable. There was little need for advanced cost accounting. Imaging centers and facilities within physician’s offices proliferated, however. Payors became far more aggressive in discounting what they would pay. When competition and pricing reach this level, only practices with a good understanding of their breakeven points will make prudent decisions on both payor contract negotiations and the nature of operations. Some license has been taken with costs and revenues in the models described here; they cannot be used as benchmarks.

Basic Financial Reporting Structures

There are two basic ways to represent financial results: accrual or cash-basis accounting. Accrual more accurately portrays when a legal entity produces income and incurs expenses and liabilities. In the health care environment, however, it is difficult to determine the true cash value of clinical services at the time they are rendered. The liquidation of a month’s charges can take between six months and two years.

Most radiology practices report operating results on either a cash or a modified cash basis. The cash basis implies that income is only recognized when cash is collected, and expenses are incurred when they are actually paid. The modified cash basis is a hybrid system where expenses are recorded when the liability is incurred; income is only recorded when cash is received.

Breakeven modeling requires alignment of income and expenses. Cash-basis reporting can skew these models because streams of income can flow in somewhat random patterns for many months after the month of service; some expense payments are also delayed, perhaps due to cash-flow limitations. The implication is that one should harvest income and expense patterns from actual data and should organize them as if they were reported on an accrual basis.

Basic Breakeven Formulation

The math of breakeven modeling is the simple part; the challenge lies in classifying and tracking the expenses that support the model (see figure). The formula for breakeven volume is:

Fixed costs/(income/exam–variable costs/exam)

Contribution margin is calculated using this formula:

Income/exam–variable costs/exam

image
Breakeven Modeling

The real world is seldom this simple. Volume growth can trigger increasing operating hours that require higher labor costs, utility expenses, and sometimes, even more rent. These create step-fixed costs (shown in red in the figure) that will shift the breakeven point to the right. Volume discounts could also enable an imaging center to secure better prices for disposables, causing the variable cost line (in green) to appear as more of a downward arc. Unit costs are highest when volume is low, but decline with increased caseloads.

Expense Classifications

Identifying and grouping expenses are critical to the modeling process. Table 1 lists the expense categories for a facility that has MRI and CT scanners running 12 hours per weekday and eight hours on Saturday. The fixed expenses show monthly information.

Click here to view Table 1

The direct expenses are categorized as variable or fixed. Some costs are easily classified. Equipment leases and maintenance will often be specific to each modality. Space rent requires the accounting staff to distribute the cost by square footage, distinguishing that devoted to imaging/control/equipment rooms from that for patient and staff support. Technologists sometimes cover more than one modality and must be required to provide time sheets based upon their caseload distribution. PACS costs could be variable (Internet-based system charged for by exam volume) or fixed (on-site hardware/software), and would be allocated using some volume formula—perhaps memory requirements per exam.

Utilities fall into all three categories. There is no published information on the variable cost of utilities per scan. When a facility is closed, metered utility use will be at its lowest; this is the fixed component. An open facility with no scheduled scans will have slightly higher metered use. The scheduled cases for the day will trigger the variable component. Modeling the allocation requires working with the utility company, the equipment manufacturer, and the building owner. Separately metering the rooms may help, where random tracking of meter values on off days is then measured against days with various caseloads.