Relative Value Units (RVU) refers to the inputs or the resources that are required to make a specific service available. These inputs can be; time medical specialist spends with a patient, amount of dollars spent for medical supplies or in medical equipment usage and so forth. RVUs are essential in healthcare facility as they support in establishing Resource Based Relative Value System that is used by Medicare and other third party healthcare providers to reimburse physicians (Marsha Scheidt, Greg Thibadoux, 2005).
The Average and Marginal Costs Per RVU
The average cost per RVU refers to total cost divided by the expected level of RVUs and the marginal cost per RVU is the incremental costs of producing an RVU (Marsha Scheidt, Greg Thibadoux, 2005). Using the provided Lovely Life LLC data for the financial year 2016 the calculations are as follows;
Step 1: Calculate the variable cost for producing one RVU
Variable cost per unit = Cost difference divided by production difference
= (High Total Fixed Costs - Low Total Fixed Costs) / (RVUs high point - RVUs low point)
= ($950,000 – $750,000) / ($14,000 RVUs – 11,000 RVUs)
= ($200,000) / (3000 RVUs)
= $ 66.67 per RVU.
Step 2: Calculate the total fixed cost
Fixed Costs = High Total Fixed Costs - (variable cost per RVU times RVUs high point).
= $950,000 – ($ 66.67 x 14,000)
= $950,000 – ($ 933,380)
= $ 16,620
Step 3: Calculate the total cost
Total Costs = Total Fixed Costs plus (variable cost per RVU times Projected RVUs for the coming month).
= $ 16,620 + ($ 66.67 x 10,000)
= 683,320
Step 4: Calculate the average and marginal cost per practice
Average cost per RVU = Total Costs / Projected #RVUs for the coming month
= 683,320 / 10,000
= $ 68.33 per RVU
Note: The marginal cost per RVU is the same as the variable cost and therefore, it is $ 66.67 per RVU.
Total Average Cost
The total cost of a medical visit or a procedure is calculated by multiplying the average cost per RVU times the number of RVUs that are allowed per procedure or visit (Marsha Scheidt, Greg Thibadoux, 2005). In this case it is calculated as follows;
Total average cost = Average cost per RVU x RVUs per CPT
= $ 68.33 x 5
= $ 341.65
Total Marginal Cost Per CPT Code
The marginal cost of a medical visit or procedure is simply the variable costs per RVU times the number of RVUs that are allowed per procedure or visit (Marsha Scheidt, Greg Thibadoux, 2005). For this case it is calculated as follows;
Total Marginal Cost Per CPT Code = Variable cost per unit x RVUs per CPT
= $ 66.67 x 5
= $333.35
Conclusions
1. Marginal cost per RVU is important in evaluating the price of each service that is being offered in order to increase the capacity to offer it. If the marginal price is greater than the price of the service that service should not be offered more (CFI, 2021). For the case of Lovely Life LLC, no service should be expanded below $66.67.
2. Average cost per RVU is used to determine if the service offered is profitable or not. If the service price is above the average cost, then it means such a service should continue to be offered. But, a price below the average cost is not healthy as it will make the facility to make losses (CFI, 2021).
The Average and Marginal Costs Per RVU
The average cost per RVU refers to total cost divided by the expected level of RVUs and the marginal cost per RVU is the incremental costs of producing an RVU (Marsha Scheidt, Greg Thibadoux, 2005). Using the provided Lovely Life LLC data for the financial year 2016 the calculations are as follows;
Step 1: Calculate the variable cost for producing one RVU
Variable cost per unit = Cost difference divided by production difference
= (High Total Fixed Costs - Low Total Fixed Costs) / (RVUs high point - RVUs low point)
= ($950,000 – $750,000) / ($14,000 RVUs – 11,000 RVUs)
= ($200,000) / (3000 RVUs)
= $ 66.67 per RVU.
Step 2: Calculate the total fixed cost
Fixed Costs = High Total Fixed Costs - (variable cost per RVU times RVUs high point).
= $950,000 – ($ 66.67 x 14,000)
= $950,000 – ($ 933,380)
= $ 16,620
Step 3: Calculate the total cost
Total Costs = Total Fixed Costs plus (variable cost per RVU times Projected RVUs for the coming month).
= $ 16,620 + ($ 66.67 x 10,000)
= 683,320
Step 4: Calculate the average and marginal cost per practice
Average cost per RVU = Total Costs / Projected #RVUs for the coming month
= 683,320 / 10,000
= $ 68.33 per RVU
Note: The marginal cost per RVU is the same as the variable cost and therefore, it is $ 66.67 per RVU.
Total Average Cost
The total cost of a medical visit or a procedure is calculated by multiplying the average cost per RVU times the number of RVUs that are allowed per procedure or visit (Marsha Scheidt, Greg Thibadoux, 2005). In this case it is calculated as follows;
Total average cost = Average cost per RVU x RVUs per CPT
= $ 68.33 x 5
= $ 341.65
Total Marginal Cost Per CPT Code
The marginal cost of a medical visit or procedure is simply the variable costs per RVU times the number of RVUs that are allowed per procedure or visit (Marsha Scheidt, Greg Thibadoux, 2005). For this case it is calculated as follows;
Total Marginal Cost Per CPT Code = Variable cost per unit x RVUs per CPT
= $ 66.67 x 5
= $333.35
Conclusions
1. Marginal cost per RVU is important in evaluating the price of each service that is being offered in order to increase the capacity to offer it. If the marginal price is greater than the price of the service that service should not be offered more (CFI, 2021). For the case of Lovely Life LLC, no service should be expanded below $66.67.
2. Average cost per RVU is used to determine if the service offered is profitable or not. If the service price is above the average cost, then it means such a service should continue to be offered. But, a price below the average cost is not healthy as it will make the facility to make losses (CFI, 2021).
