St. Mark’s came back to FHP with two surprisingly low per diem rates. The chief financial officer at St. Mark’s had realized that the 100 empty beds it had available were fixed costs and its marginal/incremental costs were only about $300 per day. St. Mark’s also knew about FHP’s existing 25 ADC being treated at Holy Cross. Therefore, St. Mark’s offered a $460 per diem price for the existing patient population, which was about a 30 percent discount from its set prices. The Medicare HMO patients that might come next year were uncertain, would be older, and would use more resources; for that population, St. Mark’s offered a diagnosis-related group rate equal to what Medicare was paying—about $745 per day.

Given this proposal, FHP did not think it reasonable to go back to Holy Cross to negotiate. Within two weeks, FHP and St. Mark’s signed an exclusive regional contract for these rates. Holy Cross was stunned. It could not believe that this had happened. Its CEO was very upset.

Case Questions, Part 2 1. How did St. Mark’s proposal completely undermine FHP’s negotiation with Holy Cross?

2. What do you think the financial impact on St. Mark’s was when the 15 ADC moved?

3. What other factors do you think would have benefited St. Mark’s and hurt Holy Cross?