Dr. Sarah Cleveland is a pediatrician in San Bernardino, California. Dr. Cleveland became a physician to help sick children; for her, medicine is as much a calling as it is a profession. Dr. Cleveland passionately believes that everyone is entitled to quality medical care and that physicians have an ethical obligation to reach out to the underprivileged. Consequently, Dr. Cleveland currently participates in numerous health-care programs. Her practice caters to patients enrolled in governmental programs such as Medicare and Medicaid; private insurance plans such as Blue Cross and Blue Shield; Health Maintenance Organizations (HMOs) such as Cigna and Kaiser Permanente; and to patients who pay their own way.

Dr. Cleveland sees many benefits and costs from being a part of HMOs. On the one hand, she is reluctant to drop HMOs because several insurance firms and HMOs restrict their members to "approved" physicians only. She wants to be on the approved list in order to expand her availability. On the other hand, insurance firms and HMOs can be difficult paymasters. In a bid to keep costs down, they tightly monitor utilization (e.g., did a given doctor have "excessive" referrals to a specialist?). They also cap doctors' payments at predetermined levels. For example, insurance firms and HMOs pay the same amount per visit or procedure regardless of the actual time spent. Thus, a doctor who takes more time than is "allowed" with a patient is not compensated for the higher time invested.

Increasingly, Dr. Cleveland has become tired of the many restrictions placed by HMOs and insurance firms on the amount of time she can spend with a patient. Currently, Dr. Cleveland is reimbursed at the rate of $40 for an office visit. The insurance firms and HMOs arrived at this rate by allowing doctors 12 minutes per office visit and considering the prevailing income for physicians (after deducting the cost of operating a clinic). The physical time spent with a patient is lower because the 12-minute standard includes time for reviewing the file and dictating notes. Although Dr. Cleveland has reduced the amount of time she spends with each patient to 15 minutes (including review and follow-up notes), she has found herself not being able to provide the quality of care she believes is appropriate and still earn a reasonable income.

Dr. Cleveland is considering a radical experiment. One of her closest physician friends tried this experiment a year ago and has reported being much happier. The experiment is to resign from all of the insurance and HMO plans. Dr. Cleveland would then tell her patients about her operating philosophy of providing excellent care unconstrained by insurance company requirements. The flip side, however, is that patients would have to pay Dr. Cleveland's billed charge, even if the patient's insurance would only reimburse a smaller amount. The patient, in effect, would be paying out-of-pocket for the extra time that Dr. Cleveland spends relative to the average physician.

Under the new scheme, Dr. Cleveland estimates that she would spend ½ hour with each patient, on average. Each patient would be billed (and pay) $75 for the office visit (most patients insurance companies would cover $40 of the $75 fee). Dr. Cleveland's costs of an office visit are negligible because any tests are billed separately. Based on an informal survey, Dr. Cleveland believes that she will have no shortage of patients if she switches to the "patient pays billed charges" approach.

Required:

a. What are Dr. Cleveland's goals? Are there any trade-offs among these goals?

b. Compute Dr. Cleveland's annual revenues if she stays with the HMOs and insurance plans. Also compute Dr. Cleveland's annual revenues if she switches to a "patient pays billed charges" approach. In either case, assume that Dr. Cleveland works 225 days per year and averages 8 billable hours per day worked.

c. Map Dr. Cleveland's decision into the four-step framework. Thus, in addition to Dr. Cleveland's goals, what are her options, what do you perceive to be the costs and benefits of each option, and how do you believe she will make her decision?

d. Assume that Dr. Cleveland switches to the patient pays approach, She then devotes 3 hours every week to caring for indigent patients, for free. She feels that providing such care is part of her obligation to society. What is the opportunity cost of this decision (assume that Dr. Cleveland continues to work for 8 hours per day)?

e. If she cuts down the per-patient time to 25 minutes, Dr. Cleveland can see three more patients per day under the patient pays option. What is Dr. Cleveland’s annual revenue if she reduces the time spent with each patient from 30 minutes to 25 minutes? What other factors should Dr. Cleveland consider?