Mr. Pasture was concerned about Green Guard’s profitability. Last year, Green Guard negotiated with Arc Electric to charge a fixed premium of $250 per employee per month. The total premium revenue is allocated as follows: 55% to hospital and surgical services, 30% to physician visits, and 15% for other services, administration, and profit.

These allocations are used to establish budgets in the different departments at Green Guard. The Arc Electric contract would expire next month, at which time Green Guard would need to renegotiate the terms of its contract with Arc Electric. Mr. Pasture feared that Green Guard would have to request a sharp rate increase to remain profitable. Green Guard’s monthly cost of administering the health plan was fixed, but the increases in the use of health care services were eroding Green Guard’s profits. He suspected that other health plans were planning to increase premiums by 5-10 percent, which was reasonable given the recent statistics on national health expenditures. A report from 2004, the most recent he could find, indicated that total national health expenditures rose 7.9 percent from 2003 to 2004 -- over three times the rate of inflation.

Exhibit 1 Monthly Report of Health Care Utilization Total Costs Incurred - Arc Electric, Inc.

Category of Service	July 2006	August 2006
Hospital Services– Inpatient	$203,425	$212,250
Hospital Services – Outpatient	$182,440	$212,250
Surgical Services	$101,250	$103,400
Physician Office Visits	$337,900	$391,450
Administrative Expenses	$90,000	$90,000
TOTAL	$915,015	$977,800

Number of members, July 31, 2006: 4129

Number of members, August 31, 2006: 4137

Using only the information provided in Exhibit 1, explain why further analysis of physician visits may be needed. Compare the profitability of hospital and surgical services to physician services, using the allocation of revenue that was given. Show the breakdown of the $250 premium using a pie chart. Does the allocation of the $250 per employee per month payment across the types of health care services seem reasonable, given the past two months’ utilization?