Example of a Breakeven Analysis

Example of a breakeven analysis

A breakeven analysis or return on investment allows you to determine the point at which your facility can expect to recover the cost of an investment. Simply stated, how many procedures will you have to do to begin making a profit? Initially, the cost of doing a new procedure will usually exceed the revenue earned by the facility for the new procedure. At the breakeven point, total revenue equals total costs. After the breakeven point, all procedures done result in profit for your facility as the total revenue received for the procedure exceeds the costs of the procedure. When it is determined how many procedures are needed to breakeven, a prediction can be made about how long in months or years it will take to being producing profit.

Breakeven analysis

The unit manager has been approached by a physician who wants to perform a new procedure. This procedure requires the purchase of equipment, supplies, and staff time.

Cost and revenue information

Fixed costs:

Equipment:$39,758.00

Service agreement for equipment – fixed for 36 months$ 5,971.00

There is no construction cost

There is no loss from other revenue associated with this procedure.

Variable costs:

Supply cost: Thorough investigation of the procedure reveals and lists every supply needed for the procedure. This includes the supply kit necessary to do the procedure, unsterile gloves, sterile gloves, gown, towels, suction tubing, suture, blades, and dressings. This investigation results in a total supply cost per case of $325.00 per patient.

Labor cost: The predicted amount of pre-procedure, intra-procedure and post-procedure time is 45 minutes. It will require one RN and one nursing assistant to assist with the procedure. The average hourly wage for these two job classes is $28.00 for the RN and $12.00 for the NA. Added together and multiply by 75% (45 minutes of 60 minutes per hour is 75%) gives us a labor cost of $30.00 per case.

Revenue sources:

Patient population: After conversation with the physician who is requesting this procedure and investigation as to how many patients would benefit from this procedure, the nurse leader makes an educated guess that 15 patients per month will receive this procedure.

Payer mix: An educated guess based on discussion with the physician and a review of the age and payer mix of patients who have the diagnosis associated with this procedure shows that 35% of the patient population will be Medicare and 65% will be commercial insurance.

Reimbursement: Once the payer mix percentages have been determined, the nurse leader will contact the finance department to request assistance in creating a break-even analysis for the potential new procedure. The finance department will need to know what the procedure is and receive a breakdown of the estimated payer mix.

Note: Since the staff in the financial department usually do not have clinical expertise, the nurse leader must be prepared to answer additional questions to determine the correct coding information for this procedure. This process can be complex for the finance department because most institutions have a variety of contracts with different insurers.

An estimate of future charges will need to be determined at that time in order to appropriately estimate the net revenue (gross charges less contractual write-offs).

You then get a call back from finance and you are informed of the following estimates of net revenue:

Medicare reimbursement: $1,560.00

Commercial reimbursement$3,397.00

Break-even analysis

Let’s use the previous information to calculate when we can expect to begin making money!

Fixed cost:

Equipment cost:$39,758.00

Service agreement for equipment – fixed for 36 months$ 5,971.00

Total start-up cost$45,729.00

Variable cost per case:

Supply cost $325.00

Labor cost $ 30.00

$355.00

The formula for the number of cases to pay for the initial investment is:

Number of cases to pay for initial investment = Fixed cost (start up cost) divided by the profit per case

Using this analysis and information, you can determine how long it will take for the new procedure to become profitable. The following is a breakdown of that analysis:

Good job! Based on this break-even analysis, this new procedure will be profitable for the organization in only a little over one month! You may be saying, “Wow, this seems like a lot of work!” It is, but again, it is necessary to understand the complete impact this service will have on our organization.

Source: The Nurse Leader’s Guide to Business Skills: Strategies for Optimizing Financial Performance, by Pamela Hunt, BS, MSN, RN, and Deborah Laughon, RN, BSN, MS, DBA, CCRN. To find out more about the book or to order a copy, visit