You are the manager of a primary care group practice consisting of 5 physicians.

You are the manager of a primary care group practice consisting of 5 physicians. The physicians in your practice are eager to merge their practice with another primary group practice serving the same market area that also consists of 5 physicians. The physicians in your practice want the merger primarily because they believe it will lead to significant economies of scale in the amount of at least 20% per patient visit. You are skeptical so you pull together the data presented below for your own practice and the practice that is of interest to your physicians (assume you were able to obtain such data about the other practice from the manager of that practice as part of the merger negotiations). Based on these data, what might you tell the physicians in your group practice about the merger's potential for significant economies of scale of approximately 20% per visit?

Your practice:

Fixed costs (e.g., major capital equipment, building) = $100,000

Variable costs (e.g., salaries and benefits, supplies) = $1,900,000

Total costs $2,000,000

Total number of office visits = 40,000

The other practice:

Fixed costs (e.g., major capital equipment, building) = $120,000

Variable costs (e.g., salaries and benefits, supplies) = $2,000,000

Total costs = $2,120,000

Total number of office visits = 45,000