The use of break-even analysis in long-term care facilities

Abstract

For the most part, long-term care facilities operate in a negotiated rate environment. Under Public Law 92-603, these facilities are compensated for rendering care to Medicaid patients on a "cost-related" reimbursement formula. Therefore, there is a limit on the ability of the owners of these facilities to pass increased costs for their services on to the consumer on a current basis, as is done in most other industries. The owners attempt to negotiate an annual rate based on anticipated increased costs of operation, and then normally have to live with the rate for the remainder of the year. In some cases the increased costs exceed the increase in the negotiated rate on an annual basis. Since there is, in effect, a lid on the revenue per patient, the opportunities to increase net income are limited either to reducing costs, or increasing the number of patients served in the facility. In this industrial setting, it would be particularly meaningful to the owner of a facility to be aware of the profitability of the operation at different occupancy levels. Also, the feasibility of expanding his facility should perhaps be explored to determine the impact of an expansion on net income retention. Break-even analysis can be employed to help address these issues. In this paper, the author briefly discusses break-even analysis as a management tool and develops a model to illustrate and apply the analysis of a long-term care facility.