accounting 9

Cascades Mental Health Clinic is a not-for-profi t, multidisciplinary
mental health provider that off ers both inpatient and outpatient services on
a full-risk (capitated) basis to members of managed care plans. Its clinical
staff consists primarily of psychiatrists, psychologists, psychiatric nurses,
social workers, and chemical dependency counselors. Currently, Cascades has
major contracts with two large managed care organizations in its service area:
Pacifi c Care Plan and Seattle Health Plan. Each of these organizations has
both commercial and Medicare health maintenance organization (HMO)
contracts with Cascades. Th us, in total, there are four separate product lines.
Cascades is partially funded by state and local governments. Th e agreement with the funding agencies is that funds received are to be used to cover
overhead and capital expenses. Furthermore, expenses for drugs and other
medical and administrative supplies are billed separately to the HMOs at
cost. Th us, overhead and supplies expenses are not part of this budget, which
means that the analysis focuses on clinical labor expenses. If the assumption
is made that other payment mechanisms cover overhead, capital expenses, and
supplies at cost, then the profi tability of Cascades is solely a function of its
ability to create revenues that exceed labor costs. Th us, its operating budget
focuses on enrollment, per member premiums, utilization, and labor costs.
Exhibit 10.1 lists the assumptions used to prepare Cascades’s 2018
operating budget. Note that the four product lines are expected to provide
a total of 4,551,000 member-months of revenue during 2018. Also, note
that each product line has a diff erent per-member per-month (PMPM)
payment (premium) amount. Exhibit 10.1 also shows expected admission
(for inpatients), referral rate (for outpatients), and labor cost and utilization
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