16

17

18

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Total cost $100,000 Total volume 1,000 Average cost $100 Payer volumes 400 100 300 Medicare (payment rate = $95) Medicaid (payment rate = $75) Managed Care 1 (payment rate = $110). Managed Care 2 (pay 80% of charges) Uninsured (pay 10% of charges) 100 100 Total all payers 1.000 Desired net income S5.000 Medicare and Medicaid presently account for 50% of the volume The hospital wishes to reduce its dependence on government payers. Assume that Medicare volume is reduced to 380 patients and Medicaid volume is reduced to 90 patients. The volume from mannged-care plan #1 rises to 320 patients from 300. The volume from managed care plan 12 increnses to 110 patients. Thus, total volume is unchanged at 1.000 visits. What is the new price necessary assuming all other factors are unchanged? Start with the original assumptions. The hospital is facing pressure from public interest groups to control the prices it charges to the uninsured. Assume that the hospital is able through various efficiencies to cut its per-visit cost by 5%. It also negotiates a 7% increase with managed-care plan #1. Assuming all other factors are unchanged, what is the new required price? Start with the original assumptions. Notice that managed care plan #1 receives a much lower price in return for sending a larger volume of patients. Managed care plan #2 (MC#2) wants to pay a lower cost per case and is willing to send 250 more patients (350 total from MC+2) to the clinic in return for a rate of Siio per case. Assume that the average cost per case drops to S90 due to the economies of scale. All other assumptions are unchanged. What is the new required price? Start with the assumptions in problem 18. But now assume that the additional volume does not enable enough economics-of-scale to reduce the average cost per case as much as originally anticipated. Assume now that the average cost per case drops only to $95. What is the new required price? Compare the answer to problem 18 with the answer to problem 19. What does this tell you about the sensitivity of the price to the assumption of the average cost per case? If you were the clinic manager, what would you do before agreeing to the renegotiated contract with managed care plan #2