Break-even Analysis (BE)

Technique for calculating the volume required for a specific service where expenses equal revenue generated.

Charges (Gross Charges)

Billed amount or price charged to payers or patients for services, typically at a discounted portion of the total charge, either through established rates (e.g., Medicare) or negotiated by commercial payers.

Cost

Expenses incurred to provide services, including direct (e.g., nursing labor, drugs, supplies) or indirect or overhead (e.g., administration, utilities, information systems). Costs can be fixed (e.g., rent and capital equipment), meaning they do not change with volume, or variable (e.g., labor, supplies), meaning they change with volume.

Cost-to-charge ratio (CCR)

Method to estimate expenses by applying a specified percentage to gross charges based on historical performance.

Income (Net Income)

Residual amount (profit or surplus) from revenue after subtracting expenses.

Internal Rate of Return (IRR)

Percentage rate at which the net present value of all cash flows (positive and negative) from an investment equals zero; used to determine the relative attractiveness of an investment or competing alternatives.

Net Present Value (NPV)

Current value of expected future cash flows from an investment, assuming a specified discount rate reflecting the amount of the initial investment plus all future cash flows (positive and negative) that the investment is expected to return.

Operating Margin

Measure of profit per dollar of revenue calculated by dividing net operating income by operating revenues. For example, a 3 percent operating margin means that each dollar of revenue generates 3 cents in profits.

Opportunity Cost Rate (Hurdle Rate)

Rate of return on an investment that could have been earned on alternative investments with similar financial risk.

Payback Period

Time period required to recover the initial expense in an investment (e.g., a new MRI).

Payment

Payment or reimbursement received that can vary for the same service provided according to the payer source (e.g., Medicare, Medicaid, or commercial insurance) and can be more (i.e., profit) or less (i.e., loss) than the expense to provide the service.

Present Value (PV)

Current value of a payment (or series of payments) expected to be received in the future, considering the cost of capital.

Return on Investment (ROI)

Measures the gain or loss on an investment as calculated by dividing the revenue (return) by the cost of the investment, and can be expressed in either dollars or as a percentage (rate of return).

Revenue

Monies received for providing healthcare services (also net, operating, or net patient service revenue).