Assignment: The assignment is related to the Hays County Integrated Delivery System (Hays) which is contained in the Nowicki finance textbook beginning on page 395. The assignment is Question #8 on page 397. The question is modified for this assignment to read as follows: Analyze my capitated managed care agreement with the city and tell me the full cost profit / loss. Should we renew the contract for the next year at present rates, or should we ask for a rate increase and if so, how much rate increase do we need to cover our full cost.

You will need to use the information and data given in the textbook for the Hays case. Particularly you will want to use the data contained in Table II, Table IV-A, Table IV-B, and Table IV-C. Further you will need to make some reasonable assumptions as you work through the problem. Your answer should consider financial analysis elements and strategy elements. For example, if you find the capitated contract with the city is losing money, do not jump to the conclusion to not renew the contract. Think about the best way forward from a strategic perspective whether the contract can be renewed.

There is no absolute right answer, but there are answers that meet a test of reasonableness.

Problem Approach:

A financial analysis of the capitated managed care contract is required. The financial analysis will need to identify the revenues coming from the terms of the contract and the expenses of providing care for the beneficiaries under the contract.

1) Revenues Revenues accruing from the capitated managed care contract with the city are relatively easy to calculate. The case indicates the city has 300 employees who pay $250 per month per family for coverage under the contract. So, annual revenues are calculated as follows: 300 (employees) X $250 (monthly premium) X 12 (months per year) = $900,000 annual contract revenue to Hays.

2) Contract Expenses To calculate expenses associated with the contract without having detailed patient level data, it is necessary to make some reasonable assumptions. In Table IV-B the percentages of patient discharges by payor are shown and the percentage of discharges for Managed Care Capitation is 5%. A simple way would then be to do a multiplication of Total Expenses of $142,247,232 as shown in Table II times 5%. The result would be expenses of $7,112,362 for the capitated contract. So, the profitability of the contract would be $900,000 - $7,112,362 or a negative of $6,212,362. That result would mean the contract terms yield an annual loss of $6,212,362 which does not seem sustainable. However, the problem with the simple way shown above is all categories of expenses are included in the calculation which may overstate the loss.

Perhaps a more reasonable, and possibly more accurate approach to identifying cost stemming from the capitated managed care contract is to drill down a little deeper on the data remembering the city members are working people of working age.

Considering Table IV-A, which includes discharges by type of service, it may be appropriate to exclude SNF and Home Health services as being not applicable to city employees. Doing so would reduce expenses for city contract employees by 5.4%. Table IV-C contains Annual charges, which could be equated to expense for this analysis. From Table IV-C charges for SNF and Home Health could be removed from consideration. So, a possibly more reasonable expenses calculation would exclude SNF and Home Health charges which would result in estimated expenses of only 73% of total annual expense. So, it could be estimated that of the total expenses base of $142,247,232, only 94.6% or $137,126,332could be attributable to the city capitated care contract. That expense number could be reduced by an additional 73% or $100,102,222. based on likely service mix. Cyclone. So, the estimated expense for the city managed care contract would be approximately $37,024,110.

That result of continues to place the city capitated managed care contract at a significant loss. The loss per family enrollee would be approximately $123,414 or $10,284 per month. So, the options are:

1) Not renew the contract and $900,000 in revenue is lost.

2) Increase the premium per month by just less than $10,000 which is probably not realistic.

3) Renew the contract at a higher rate (probably double) for each of the next three years.

4) Exclude certain services you would identify as carve outs that would need to be paid by the city at cost.

5) Institute a case management program for city capitated managed care contract beneficiaries to reduce costs from the provision of services under the contract.

On balance, if the decision whether to renew the contract is based strictly on current financial performance, the answer would be do not renew. If however, the situation is considered in a more strategic fashion, it may make sense to keep the city as a client and its associated revenue and (1) talk with the city about the financial performance of the contract and (2) manage the provision of services under the contract more closely.