Directions: Use the following information to solve the two problems that are listed below. 1. Please use a cover page including your name, date, instructor, and course. 2. For the following problems, start with the price-setting example from the text. The initial assumptions are provided in the attached LP3.2 Table.

Graded Problems 1. Start with the original assumptions from the LP3.2 Table. Notice that managed care plan #1 receives a much lower price in return for sending a larger volume of patients. Managed care plan #2 (MC#2) wants to pay a lower cost per case and is willing to send 250 more patients (350 total from MC#2) to the clinic in return for a rate of $110 per case. Assume that the average cost per case drops to $90 due to the economies of scale. All other assumptions are unchanged. What is the new required price? Review the LP3.2 Assumptions.

Explanation for part A of the formula in theLP3.2 Assumptions.

A. Look on page 142 and see that we are looking for a loss on the fee schedule and if we come out with a gain on the fee schedule it would be a negative number for the sake of accounting math, since our search is for a loss.

Consider that our average cost went down from $100 to $90 to determine our loss on the fee schedule, and that we have 4 fixed prices to consider: 1-Medicare 2-Medicaid 3-Manage Care #1 4-Managed Care #2 In the original assumption we only had 3 fixed prices, but that changed with making MC#2 a fixed price at $110.

Now determine the change in the fee schedule by looking at the sum of the changes based on the new average of $90: (Which is $90 - new pricing)

Medicare 400 patients x $5 (difference in average price and agreed on price)= $2000

Medicaid (100 x $15= $1500)

MC #1 (300 x $10 = $3000)

MC #2 (350 x $20 = $7000)

We have no losses in fees, only gains.

The total is $13,500, but we know that our formula is set-up for losses, so to reverse the effects of a negative search for a positive result we need to change the positive number to a negative number. Explanation for part B of the formula in the LP3.2 Assumptions B. We need to calculate the average discount on charge payers and we need to understand that in this problem our charge payers went from 2 to only one from our original assumptions because MC #2 became a fixed payer in our homework problem.

When we have more than one, we add up the discounts according to page 142 in the text, but here we only have one: (100/100 x10 = .1)

Now plug that into your formula for the ?Average discount experienced on charge payers?

2. Start with the LP3.2 Assumptions in the previous question. But now assume that the additional volume does not enable enough economies-of-scale to reduce the average cost per case as much as originally anticipated. Assume now that the average cost per case drops only to $95. What is the new required price?

3. Compare the last two answers in a 1-2 paragraphs. What does this tell you about the sensitivity of the price to the assumption of the average cost per case? If you were the clinic manager, what would you do before agreeing to the renegotiated contract with managed care plan #2?

Price Setting Slide 1 This presentation is going to cover various aspects of pricing setting. It is important for healthcare organizations to determine the correct price for healthcare services. This can be difficult when various payors like Medicare, Medicaid or manage care organizations reimburse at different rates. We will focus on key points on this week's problem. After watching this presentation follow the instructions in your assignment to complete the financial calculations for this week. Slide 2 Healthcare organizations need to assure they make a profit in order to continue to operate. In this example the healthcare organization has determined that it must make $5000 in net income to continue to operate. If it cost us $100,000 to operate, and we want $5000 in profit, we need to base our price setting calculations on making $105,000. The organization must list payers, volumes and payment rate from each of the revenue streams to be able to calculate the prices they need to negotiate with reimbursement agencies. These are the figures from table 3.2 in your assignment. We start out with an average cost of $100 for 1000 procedure, so we have $100, 000 of total cost. The financial make-up of the 1000 procedure is shown on your screen. The fixed cost include, Medicare paying $95 for the 400 patients, Medicaid paying $75 for the 100 patients, and managed care #1 paying $110 for the 300 patients. Since each of these reimbursements is a fixed amount, they are considered fixed payors. The total of the three fixed payors is $78,500. Now remember we need to make $105,000, so we subtract the $78,500 from $105,000 to have a remaining amount of $26,500 to make from managed care #2 and the uninsured payments, which is calculated by knowing the patient volume of each and the percentage we know we can collect of the charges. Total cost $100,000 Total volume 1,000 Average cost $100 Payer volumes Medicare (payment Rate = $95) Medicaid (payment Rate = $75) Managed Care #1 (payment rate = $110) 400x$95 = 100x$75 = 300x$110= $38,000 $7,500 $33,000 Total fix payment= $78,500 Remaining amount to be billed $105,000 - 78,500 = $26,500 The remaining two categories of payors, managed care Managed Care #2 (pay 80% of charges) Uninsured (pay 10% of Charges) 100x80%x$294.44= 100x10%x$294.44= Total payments $23,555 $2,944 $105,000 Total Cost Desired net income -$100,000 $5,000 Slide 3 Now let's take a look at how an organization would use the formula when volumes and pricing change, which they do. In our first problem there are changes to the volume and pricing for several payors. The managed care #1 payment went down and the managed care #2 became a fixed payor, as well as there being changes to the average cost. Considering the changes, we set-up the formula for you to calculate, which can also be found under the link LP3.2 Assumptions. Medicare 400 x $95 = $38,000 Medicaid 100 x $75 = $ 7,500 Managed care #1 300 x $100 = $30,000 Managed care #2 350 x $110 = $38,500 Uninsured 100 x 10% x $294.44 = $ 2,944 Slide 4 When performing this calculation make sure to complete the portion in parenthesis first, making sure to follow good algebraic rules. This will give you the price for the first problem. Price= 90.00 + ((5000-13,500)/100) 1-.9 Slide 5 Now let's move onto the second problem for this week. You can see we have similar changes to the total cost and average cost. Slide 6 Now perform your calculations using the following formula and figures on the screen. This will give you the price for problem number two. Once you have completed calculations for problem one and two, proceed with answering questions 3. LP3.2 (#1 Assumptions) Using the original numbers from the table Medicare 400 x $95 Medicaid 100 x $75 Managed care #1 300 x $100 Managed care #2 350 x $110 Uninsured 100 x 10% x $294.44 = $38,000 = $ 7,500 = $30,000 = $38,500 = $ 2,944 ------------------$105,000 - $100,000 -------------------$5,000 net income 90 + 5000 -13,500 (A-read explanation below) 100 = $?? 1-0.9 (B-read explanation below) LP3.2 Table Total cost $100,000 Total volume 1,000 Average cost $100 Payer volumes Medicare (payment Rate = $95) 400 Medicaid (payment Rate = $75) 100 Managed Care #1 (payment rate = $110) 300 Managed Care #2 (pay 80% of charges) 100 Uninsured (pay 10% of Charges) 100 Total all payers 1,000 Desired net income $5,000