Assume that you are the CEO of Space Coast Healthcare, a large regional hospital serving a patient population of more than 300,000. The hos- pital has virtually no competition and hence domi- nates the local inpatient services market. However, the local health insurance market is dominated by two large companies: one national in scope and the other a major statewide player. You fear that the purchasing clout of the two third-party payers will put so much pressure on prices that it will be difficult for the hospital to maintain sufficient prof- itability to ensure financial soundness.

To counteract the market dominance of the payers, the hospital is starting its own managed care company, beginning with a single HMO-style managed care plan. Once the managed care plan launches, it will send patients to Space Coast hospitals. Thus, the hospital must make a deci- sion about its pricing policy for its "in-house" managed care plan.

Should it price high to maintain strong margins, or should it price low to help the new managed care plan attract members?