BRIGHTFORM, INC. 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 BFIs 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 BFIs 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. Whats 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. Mr. Fleming was concerned about BFIs profitability. Last year, BFI negotiated with 101App 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 BFI. The 101App contract would expire next month, at which time BFI would need to renegotiate the terms of its contract with 101App. Mr. Fleming feared that BFI would have to request a sharp rate increase to remain profitable. BFIs monthly cost of administering the health plan was fixed, but the increases in the use of health care services were eroding BFIs 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. Mr. Fleming called in the rest of his staff to assist him in devising a strategy for renegotiating the 101App account. If possible, I would like to figure out how we can continue providing this service for the rate we established last year. I am afraid if we attempt to increase the per member premium, 101App will contract with another health insurer. What other options do we have? John Lucas, who works in Membership Marketing, reported that he recently conducted a survey of cost control mechanisms used by other health plans. His analysis revealed that BFIs competitors are increasing their use of these mechanisms, which include copayments, waiting periods, pre-authorization requirements, and exclusions on certain health care services. 1

One of the problems, in my opinion, is that the 101App employees have nearly full coverage for all their health care services, remarked Lucas. The 101App employees should pay some part of their health care services out-of-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 dont 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 dont 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 BFIs 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 dont, 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 BFIs members. Mr. Fleming dismissed his staff. Eager to resolve this issue, he phoned your consulting company for assistance. BFIs executives would need a full report of the current situation and evaluation of his staffs suggestions to either (a) increase the copayment, or (b) implement a reduction in charges for physician office visits. Required: Prepare a report of BFIs 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 2

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 TOTAL 915,015 Number of members, July 31, 2006: 4129 Number of members, August 31, 2006: 4137 Exhibit 2 July 2006 August 2006 212,250 180,700 103,400 391,450 90,000 977,800 203,425 182,440 101,250 337,900 90,000 Data file has been provided on the course website. Exhibit 3 Sample Means for Annual Use of Health Care Services Copayment Level Physician Visits Per Capita $10 6.3 $15 6.0 $20 5.7 $25 5.4 $30 5.1 $35 4.8 Source: Demand for Health Care Services at Different Copayment Levels: Results Based on a National Study of Health Insurance Enrollees 3

Q. 1. 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? After reviewing the information, you have provided in Exhibit 1, I conducted a further analysis of physician visits. Q. 2. Calculate the mean and standard deviation for these measures for this six-month period. Explain how these statistics are useful in understanding the trend in total outpatient physician costs per 101App employee. Q. 1. 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? After reviewing the information, you have provided in Exhibit 1, I conducted a further analysis of physician visits. Q. 2. Calculate the mean and standard deviation for these measures for this six-month period. Explain how these statistics are useful in understanding the trend in total outpatient physician costs per 101App employee