InterCon Travel Health is a Toronto-based company that provides services to health insurers of foreign tourists who travel to the United States and Canada.4 As described in the Guided Example in this chapter, the primary focus of InterCon is to act as an interface between local health providers and the overseas insurance company that insures the tourist should the traveller find him- or herself in need of medical attention. The customer base of sick or injured tourists is potentially profitable because most tourists who fall ill require only minor treatment and rarely come back for expensive follow-up visits. Therefore, InterCon can pass savings along to the foreign insurer by facilitating claim management and payment and can collect processing fees from these insurance companies in return.

Currently, this Canadian company charges a processing fee of 9.5% (collected partly from the medical providers and partly from the foreign insurers) and has experienced an average annual growth rate of 3%. However, a backlog of claims and a cyclical pattern to the claims (due to high tourist seasons) has caused a delay in filing claims with the foreign insurers, resulting in a number of noncollectible claims. In addition, while the growing company has been trying to keep costs to a minimum, it’s considering adding a new information technology system to help streamline the process. Most of the company’s revenue comes from claims for inpatient hospital stays, which average approximately $10,000. These claims represent 20% of InterCon’s claims but over 80% of its claim revenue. The remaining claims arise from clinic and emergency room visits.

To help with rising costs, this firm may consider raising the processing fee as high as 11.0%. While this would generate additional revenue, the firm would also incur the risk of losing contracts with insurers and health-care providers. Here are estimates of the impact of a change in rates on the annual fee revenue depending on the strength of foreign tourism:

What is the expected revenue for the respective fee alternatives based on the total income from fees? Should InterCon increase its fees? Suppose the manager gets new information and revises the probabilities for the strength of tourism to be even, at 50/50. What are the new values for expected revenue, CV, and the return to risk ratio? Should the company increase its fees?

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Processing Fee Rate at 9.5% Payoff ($) 54,069,129 56,231,894 Processing Fee Rate at 11.0% Payoff ($) 53,472,101 56,921,006 Foreign Tourism Probability Weak 0.40 Strong 0.60