Getting to the bottom line. Hospitals' survival may hinge on the contribution margin

Abstract

Healthcare managers have devoted increasing attention to product line management in the face of growing competition. The general belief has been that although product line management and the contribution approach (internal financial reporting and analysis that distinguish between variable and fixed expenses and include the contribution margin) help enhance profitability for hospitals that have the prerequisite software systems and management expertise, they are hardly necessary for survival. But the contribution approach to product line management may indeed be required for survival for all hospitals. Current hospital accounting systems do not provide information on which products contribute to fixed expenses and profitability and which, although vital, are financial losers. Product line managers need this information to make optimal decision trade-offs among quality, availability, and benefits of medical services. The contribution margin is the difference between the fee received for the service and the variable expenses incurred in providing the service. It represents the resources available to cover fixed expenses that will occur regardless of volume and to provide a profit (or, for the not-for-profit, to provide working capital and expand services).