BrightForm, Inc. (BFI) is a managed care company that provides and finances health care services for employees of 101App, Inc. Approximately 5,000 employees at 101App are currently enrolled in BFI's health insurance plan. The number of enrollees has increased over the past year as 101App continued to expand its workforce, and more and more 101App employees have elected to receive this benefit. 101App currently pays BFI the full cost of health insurance for its employees. This insurance provides comprehensive coverage for inpatient and outpatient hospital care, surgical services, physician office visits, and other services (e.g., x-rays). The only cost to employees is a $15 copayment for each physician's office visit. Robert Fleming is the Director of Strategic Planning and Forecasting at BrightForm, Inc. His key function is to direct the overall development and analysis of all strategic financial planning initiatives relating to BFI's managed care programs. His staff is involved in many activities, including preparing periodic reports of the costs incurred under the 101App account. Every time a 101App employee uses health care services, information about the type of service and the relevant costs are recorded in a database. Mr. Fleming recently directed his staff to perform a financial analysis of the current utilization and costs incurred under the 101App account. Bad News Hanna Brooks personally delivered her summary of utilization on the 101App account to Mr. Fleming (See Exhibit 1). The data, he noted, indicated a sharp increase in the number of physician office visits over the past month. He remarked, "The 101App employees' use of outpatient physician services has been going up for the past six months. What's going on?" He asked Ms. Brooks to provide him with the enrollment numbers to see if the increase in the utilization of physician services was primarily due to the change in the number of employees enrolled in the health plan. "No problem," she replied. "I have already put the last six months' weekly statistics into a spreadsheet." pocket, so that they share an incentive to stay healthy. BFI only charges a $15 copayment, but many other health insurance plans require that enrollees pay $20 25 for each physician office visit. A higher copayment will help us reduce the use of physician services." He showed them the results from a national study that showed a significant relationship between the amount of a copayment and the number of visits to a physician (See Exhibit 3) and recommended that Mr. Fleming consider implementing a larger copayment for each physician visit when the contract with 101App is renegotiated. Miranda Cook, who works in Provider Relations, disagreed. "I don't think a higher copayment is going to reduce the level of physician visits. The demand for health care services is a derived demand because it depends on the demand for good health. People don't necessarily want to visit their physician, but they often have to in order to stay healthy. If we want to cut our costs, we will have to figure out how to pay the health care providers less." BFI currently pays for health care services on a fee-for-service basis. Most of the area hospitals and physicians "participate" in BFI's health insurance plan. When 101App employees obtain health care services from participating health care providers, the providers are reimbursed for their costs directly by BFI. Several factors have increased health care costs over time, including the growing availability of medical technology, such as magnetic resonance imaging (MRI), and increased medical malpractice litigation. Ms. Cook suggested that Mr. Fleming consider negotiating with physicians to lower the costs of the services provided. "I have heard that some managed care plans have cut deals with physicians to lower their charges by 10-25 percent," she said. "Physicians have accepted these deals because if they don't, they could be cut out of the health insurance plan and they could lose all their patients." Mr. Lucas conceded that this might be possible, but expressed his concern that if participating physicians accepted a lower amount per visit, they might reduce the quality of care they provide to BFI's members. Mr. Fleming dismissed his staff. Eager to resolve this issue, he phoned your consulting company for assistance. BFI's executives would need a full report of the current situation and evaluation of his staff's suggestions to either (a) increase the copayment, or (b) implement a reduction in charges for physician office visits. Required: Prepare a report of BFI's current financial situation and include an evaluation of the two options for controlling costs on the 101App account. Use the guidelines for writing a report on the course web site. You may wish to review the following LDc Concepts: Microeconomics 3 and 5, SOM 1, 4, and 7. Exhibit 1 Monthly Report of Health Care Utilization Total Costs Incurred - 101App, Inc. Category of Service Hospital Services- Inpatient Hospital Services - Outpatient Surgical Services Physician Office Visits Administrative Expenses OTAL August 2006 212,250 July 2006 203,425 182,440 180,700 101,250 103,400 337,900 391,450 90,000 90,000 915,015 977,800 Number of members, July 31, 2006: 4129 Number of members, August 31, 2006: 4137 Exhibit 2 Datofile has been provided in "BrightForm - Student Dota Spreadsheet" Week Total Costs of Physician Visits ($) # Visits # Employees 77,322 401 4,065 79,177 423 4,065 74,888 404 4,062 73.428 407 4,063 74,535 404 4,069 75,487 432 4,070 74,222 430 4,076 75,499 452 4,076 9 76,300 457 4,083 10 76,033 459 4,081 11 78,832 446 4,088 12 79,755 481 4,087 13 80,243 484 4,095 14 78,993 484 4,101 15 81,227 491 4,099 16 84,219 496 4,103 17 82,177 500 4,112 18 82,456 450 4,115 19 81,100 469 4,126 20 84,211 498 4,130 21 90,133 495 4,129 22 95,120 500 4,129 23 99,865 520 4,129 24 97,752 505 4,136 25 98,713 517 4,137 Exhibit 3 Sample Means for Annual Use of Health Care Services Physician Visits Per Capita ayment Level $10 6.3 $15 6.0 $20 $25 $30 $35 5.7 5.4 5.1 4.8 un unin4