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Project Management in Practice

Managing Costs at Massachusetts'

Neighborhood Health Plan

In just a 2-year period, Medicaid reduced its rate of reimbursement by 20 percent while the State of Massachusetts imposed higher eligibility requirements for health subscribers, thereby significantly reducing Neighborhood Health Plan's (NHP) revenues and threatening its viability. In the past, NHP had controlled costs by controlling hospital bed utilization and

increasing preventive medicine. However, no matter how low hospital utilization is, if hospital contract rates are expensive, the cost to NHP will be high. Thus, NHP chartered a

project team to help it manage costs through better selection and management of hospital contracts. More specifically, the team's charter was to develop a method to examine hospital contracts to assure that proposed rates were financially viable to NHP but high-quality care would be available when needed. The team first selected the top 10 to 20 hospitals based on total annual payments from NHP for analysis. From these, they determined that to control costs effectively, NHP's contracting philosophy would have to change from the current 95 percent of all line items per episode to a fixed cost per episode or per day per type of stay. The team then constructed a spreadsheet that allowed cost comparisons to be made across hospitals, which allowed management to bargain for lower rates or, if hospitals were inflexible, suggest to health centers

what alternative hospitals to refer patients to. This and later developments by the team significantly enhanced management's ability to contain their costs while guaranteeing that

quality care would be available when needed. It also allowed management to examine and respond to contracts and proposed contract changes in a timely and informed manner.

Questions

1. Wouldn't higher eligibility requirements for subscribers cut NHP's health-care costs? Why did this exacerbate NHP's situation?

2. Explain the trade-off between hospital utilization and contract rates.

3. How did changing from a line item pay plan to an episode plan allow comparisons and save costs?

12:38 B 2 K/s 1 73 attachment Part I. (45 points) 1. Use the following algebraic model of an economy to answer parts a-d. You may use graphical versions of this model to answer parts e and f. Labor Demand: Ld = no - ni*(W/P) + nak Labor Supply: Ls = So + S:"(W/P) - Sz*t. Labor Market Position: U = (Ls - Ld)/Ls + U* (4) Production: Y = Tech*Ld7 -KJ (5) Consumption: C = Ca + cr*Yd (6) Investment 1 = d -er + fry (7) Net Exports: X = go - gi*Yd - g="r+g,"y' (8) Disposable Income Yd = Y - T (9) Taxes: 1= to + toy (10) Aggregate Expenditure AD = C+1 +G+x (11) Goods Market Equilibrium: Y = AD (12) Money Demand: Md - P = h,*Y - hol (13) Money Supply M = mo + my*i + ma*(Y - Y) (14) Money Market Equilibrium: Md = M (15) Nominal Interest Rate: Endogenous Variables Exogenous Variables Ld,P.U.Ls,Y.C.Yd, T W.K.U*, Tech, Y, Y. & and I,X AD,Md,Mi various autonomous terms (e.g, ne, S.. and t.) (8) a. Derive the IS Curve. ( 6) b. Derive the LM Curve. (6) c. Derive the Aggregate Demand Curve and indicate its slope. (5) d. Derive the Aggregate Supply Curve and determine the sign of its slope. (10) e. Determine the effect of an increase in expected inflation () on output, prices, real interest rates, and employment. Show graphics. (10) f. Show how an increase in the capital stock (K) affects output, prices, real interest rates, and employment. Show graphics. 2. (30 points) Consider the following version of model 5. Mccallum's Rule has replaced Taylor's Rule, Except where indicated, variables are expressed in current year terms thus the "I" subscript has been suppressed. IS Curve: Y = Y - a(r - p) + e Fisher Equation: r= i - n Phillips Curve [ = " + (p(Y - Y" ) +v Inflation Expectations: Mccallum's Rule: M = M.1 + 81*(n* - n) + 82*(Y"-Y) Money Demand: Md = k*Y - h*i Money Market Equilibrium: M = Md Endogenous variables: Y, r, n, n', M, Md, i Exogenous variables: Y', p, c, v, It* (4) a. Derive the LM curve. (6) b. Derive the dynamic aggregate demand curve. Indicate its slope. (4) c. Determine the dynamic aggregate supply curve and indicate its slope. (8) d. Indicate the effects of a change in the potential GDP (Y") on the paths of output and inflation. (8) e. Indicate the effects of a negative supply shock (v >0) on the paths of output and inflation. Part II (15 points each) Answer four of the following questions. Indicate any noteworthy assumptions. 1. Evaluate the quotation at the beginning of the exam. If you believe that it is true, provide evidence to support your assertion. If you believe that it is false, how would you change the statement to make it true? Provide evidence to support your claim. 2. What is Okun's Law? How have macroeconomic policy makers used it to determine how much stimulation should be provided by monetary and fiscal policy? C. In what ways might Okun's Law be a misleading guide to appropriate policy? O1. Use the following version of the ISrLM model to answer all parts of this question. Endogenous Exogenous Consumption: C = 200 + .S*Yd Variables Variables Dispoable Income: Yd =YT Taxes T = 125 + .25*'r' C, Yd, T, Y M, G, P, Yf Investment | = 20o - 20*r AD; I, r, N): (foreign'f) Net Exports NX =1DD .2\"! 5*r +.1"r'f Md Aggregate Demand AD = C + I + G + NH Goods Market Equilibrium '1' = AD Money Demand Md = (.5'1" h 50*r)*P Money Market Equilibrium Md = M Assume YcYp a. (5) Solve for the IS curve and identify its slope. b. {4) Solve for the LM curve and identify its slope. c. (4) Find the reduced form statement for 'r'. d. {5) Based on the results in part c, does monetary policy or fiscal policy have a larger impact on GDP? Support your answer. {5) What would be the effect of a decline in foreign income (W) on output and interest rates in this economy? Support your answer. 5'\" 2. Consider a Solow growth model (1 G type] with the following production function. Y1 = K1" {Tech'LJ' a. (5) Specify and explain the steady state condition for this model. b. ('1') Assume that technology grows at a rate of g percent per year and labor grows at n percent per year. Determine the equilibrium time path for y (output per laborer at any given time period E.) c. (5) Determine how fast output per laborer grows along its steady~state path. _. L d. (7") What would be the effect of an increase in the savings rate on the steady state path for output per laborer and capital per unit of labor? (You may use graphical or mathematical analysis for this part.) """""""'PBQB Break-\""-----*--*-*--"-----------'-"---*-*--""- 1 {24 points} Consider the following version of model 5. Except where indicated. variables are expressed in current year terms thus the "t" subscript has been suppressed. Be sure to show your work for all parts. ISGurve: Y=W-c{r-p}+hlx+s Net Exports Nit = its - xi-E Fisher Equation: r = i - tt' Phillips Curve; it = n'+ ipfr - W] + v Ination Expectations: n\" = 11.1 Monetary Rule: I: n + p + [3*{n - 11*] + {1- [31*{Y-YP} [l s p: \"I Endogenous variablesLY, r, Nit. n.rr'.i Exogenous variables: 1'i'\".p.e.E.xiu.v.rt"' (a) a. Derive the dynamic aggregate demand curve. Indicate its slope. (3] b. Determine the dynamic aggregate supply curve and indicate its slope. [3] c. Paul Krugman. [ilivier Blanchard and others have suggested that the inflation target {at} be raised to 4%. What would happen to the paths for output and inflation if monetary policy reflected this new inflation target? {F} d. How would the results In d change if inflation expectations were rational? Part II {12 points each} Answer three of the following questions. Indicate any noteworthy assumptions. 1. Evaluate the quotation at the beginning of the exam. If you believe that it is true. provide evidence to support your assertion. If you believe that it is false. how would you change the statement to make it true? Provide evidence to support your claim. 1 Use Model 4 to determine the effect of an exogenous increase in net exports on GDP, P, L, U, WP and r. Assume if: \"if" . Provide graphics to support your claim. 3. Use Model 5 to determine the paths of output and inflation if there is a positive aggregate supply shock in period t [rec in s [1}. Provide graphics to support your claim. 4. The Iron Triangle or lm possible Trilogy a. In terms of policy making regarding openness of the economy, what three policy options must be jointly considered by macroeconomic policy makers? Explain why the third policy depends upon the choice of the first two. b. In light of the Iron Triangle, why might large countries and small countries make different policy choices? Part I. (40 points) 1. Use the following algebraic model of an economy to answer parts a-d. You may use graphical versions of this model to answer parts e and f. (1) Labor Demand: La = no - m1*(W/P) + nz*K + n3*RM (2) Labor Supply: La = So + ST*(W/P) (3) Labor Market Position: U = (Ls - La) /La + * ( 4 ) Production: Y = Tech*Ld* *K-*RM1 (5) Consumption: C = Co + 01*Yd +cz*NW - c3*P (NW = net worth) (6) Investment: 1 = d - e*r (7) Governmental Expenditures G = Go + f*(Y" - Y) (8) Net Exports: X = go - g1*Yd - gz*r (9) Disposable Income Yd = Y - T (10) Taxes: T = ta + t,*Y (11) Aggregate Expenditure: AD = C+1+G+X (12) Goods Market Equilibrium: Y = AD (13) Money Demand: Md - P = hi*Y - h2*i (14) Money Supply: M = mo + mi*i (15) Money Market Equilibrium: Md = M (16) Nominal Interest Rate: ier+ ne Endogenous Variables Exogenous Variables Ld,P.U,LS, Y,C.G, Yd, T,r W,K,RM, U*, Tech, NW, Y, n and 1,X,AD,Md,M,i various autonomous terms (e.g., no, So, to) Derive the IS Curve. (4) Derive the LM Curve. (6) C. Derive the Aggregate Demand Curve and indicate its slope. (6) Derive the Aggregate Supply Curve and determine the sign of its slope. (9) e. Determine the effect of an increase in potential GDP (Y) on output, prices, real interest rates, and employment. Show graphics based on the above model. (9) f . Show how an increase in the raw materials (RM) affects output, prices, real interest rates, and employment. Show graphics based on the above model.1. (25 points) For each of the following scenarios, use a supply and demand diagram to illustrate the effect of the given shock on the equilibrium price and quantity in the specified competitive market. Explain whether there is a shift in the demand curve, the supply curve, or neither. (a) (5 points) An unexpected temporary heat wave hits the East Coast. Show the effect in the ice cream market in New England. (b) (5 points) The government introduces a tax on ice cream which is paid by producers. What is the effect in the ice cream market? (c) (5 points) China and Mexico are major producers of textiles. Workers in Mexico decide to go on strike. Show the effect on the market for Mexican textiles. (d) (5 points) Show the effect of the situation described in (c) on the market for Chinese textiles. (e) (5 points) Suppose the government imposes a price cap on bottled water. Show the effect in the bottled water market. Problem 1 courtesy of William Wheaton. Used with permission. 2. (20 points) For each of the following pairs of goods, identify which one you would expect to have more own-price elastic demand. Please explain your reasoning (a) (5 points) Computers (generally) vs. Apple MacBook Pro laptops. (b) (5 points) Stereo headphones (generally) vs. hearing aids. For each of the following goods, identify whether you would expect demand to be more (own-price) elastic in the short run or the long run. As above, please briefly explain your reasoning. (e) (5 points) Retail gasoline in the suburbs of Chicago. (d) (5 points) Air conditioning units in Miami Beach, Florida. Problem 2 courtesy of Luke Stein. Used with permission. 3. (30 points) Consider the market for apple juice. In this market, the supply curve is given by Qs = 10P) -5PA and the demand curve is given by Qp = 100-15Py + 10Py, where J denotes apple juice, A denotes apples, and T denotes tea. (a) (7 points) Assume that PA is fixed at $1 and Py = 5. Calculate the equilibrium price and quantity in the apple juice market. (b) (7 points) Suppose that a poor harvest season raises the price of apples to PA = 2. Find the new equilibrium price and quantity of apple juice. Draw a graph to illustrate your answer. (c) (8 points) Suppose PA = 1 but the price of tea drops to Py = 3. Find the new equilibrium price and quantity of apple juice. (d) (8 points) Suppose PA = 1. Pr = 5, and there is a price ceiling on apple juice of Py = 5. What is the excess demand for apple juice as a result? Draw a graph to illustrate your answer. Problem 3 courtesy of William Wheaton. Used with permission. 4. (25 points) You have been asked to analyze the market for steel. From public sources, you are able to find that last year's price for steel was $20 per ton. At this price, 100 million tons were sold on the world market. From trade association data you are able to obtain estimates for the own price elasticities of demand and supply on the world markets as -0.25 for demand and 0.5 for supply. Assume that steel has linear demand and supply curves throughout. (a) (10 points) Solve for the equations of demand and supply in this market and sketch the demand and supply curves. (b) (15 points) Suppose that you discover that the current price of steel is $15 per ton and the current level of worldwide sales of steel is 150 million tons. The most recent elasticity estimates from the trade association this year are -0.125 for demand and 0.25 for supply. Describe the change in the supply and demand curves over the past year using your diagram from part (a). What sort of event(s) might explain the change?1. (36 points) Two firms, A and B, are competing in the production of a homogenous good. The good's marginal cost for both firms is equal, MC = $25. Assuming linear reaction functions, describe what would happen to output and price in each of the following situations if the firms are in (i) collusive equilibrium, (ii) Cournot equilibrium, (iii) Bertrand equilibrium. (a) (4 points for each of (i)-(iii)) The demand curve shifts to the left. (b) (4 points for each of (i)-(nii)) Because it invents a new and improved machine, the marginal cost at firm B decreases to $20. (c) (4 points for each of (i)-(ii)) Costs in the entire industry increase due to an increase in wages. Problem 1 by MIT OpenCourse Ware. 2. Problem removed due to copyright restrictions. This content is presented in audio form in the Solution Video for Problem Set 8, Problem 2. 3. (28 points) Suppose a perfectly competitive labor market has a demand curve of [ = 120 - 2w and a supply curve of IS = Sw, where w is the wage rate is dollars and & is the quantity of labor in person-hours. (a) (2 points) What are the equilibrium values of the wage and employment? (b) (4 points) Suppose the government imposed a minimum wage of $14 per hour. Now what are the equilibrium values of the wage and employment? (e) (8 points) Repeat part (a), assuming now that the market is a monopsony. (d) (8 points) Repeat part (b), assuming now that the market is a monopsony. (e) (6 points) Does the imposition of the minimum wage decrease employment here under perfect competition? What about under monopsony? Give a brief intuitive explanation for your answer and why it may be different under the two different market structures. Problem 3 courtesy of William Wheaton. Used with permission. 4. (11 points) Suppose you face the following lottery. You can earn 1 of 3 possible grades in this class: an "A", a "C", or an "F, with the following probabilities: TA = 10' TO = T 10' TF = 10 Your current wealth (w) is $400. If you receive an "A", you gain (e.g. I pay you) $500. However, if you get an "F" , you lose (e-g. you pay me) $300. If you receive a "C", you DO NOT GAIN OR LOSE anything. Assume your utility function, defined over wealth, is U(w) = v(w). (a) (6 points) What is your expected utility (EU)? [Hint: be sure to calculate your total wealth in each "state".] (b) (5 points) What is the certainty equivalent level of wealth (w*), that is, the guaranteed payoff at which a person is "indifferent" between accepting the guaranteed payoff and their expected utility from (a)