GOODLIFE ZONE Goodlife Zone (Goodlife) is a managed care company that provides and finances health care services for employees of Sparks Interactive, Inc. Approximately 5,000 employees at Sparks Interactive, Inc. (Sparks) are currently enrolled in Goodlife's health insurance plan. The number of enrollees has increased over the past year as Sparks continued to expand its workforce, and more and more Sparks employees have elected to receive this benefit. Sparks currently pays Goodlife 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. Brad Green is the Director of Strategic Planning and Forecasting at Goodlife Zone. His key function is to direct the overall development and analysis of all strategic financial planning initiatives relating to Goodlife's managed care programs. His staff is involved in many activities, including preparing periodic reports of the costs incurred under the Sparks account. Every time a Sparks employee uses health care services, information about the type of service and the relevant costs are recorded in a database. Mr. Green recently directed his staff to perform a financial analysis of the current utilization and costs incurred under the Sparks account. Bad News Clara Davis personally delivered her summary of utilization on the Sparks account to Mr. Green (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 Sparks employees' use of outpatient physician services has been going up for the past six months. What's going on?" He asked Ms. Davis 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. Green was concerned about Goodlife's profitability. Last year, Goodlife negotiated with Sparks to charge a fixed premium of $260 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 Goodlife. The Sparks contract would expire next month, at which time Goodlife would need to renegotiate the terms of its contract with Sparks. Mr. Green feared that Goodlife would have to request a sharp rate increase to remain profitable. Goodlife's monthly cost of administering the health plan was fixed, but the increases in the use of health care services were eroding Goodlife's 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. Green called in the rest of his staff to assist him in devising a strategy for renegotiating the Sparks account. "If possible, I would like to figure out how we can continue providing this service for the rate we established last year. I'm afraid if we attempt to increase the per member premium, Sparks will contract with another health insurer. What other options do we have?" Manny Ramirez, 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 Goodlife's competitors are increasing their use of these mechanisms, which include copayments, waiting periods, preauthorization requirements, and exclusions on certain health care services "One of the problems, in my opinion, is that the Sparks employees have nearly full coverage for all their health care services," remarked Ramirez. "The Sparks employees should pay some part of their health care services out-of-pocket, so that they share an incentive to stay healthy. Goodlife only charges a $15 copayment, but many other health insurance plans require that enrollees pay $20 - 25 for each physician's 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. Green consider implementing a larger copayment for each physician visit when the contract with Sparks is renegotiated. Francesca Carol, 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." Goodlife currently pays for health care services on a fee-for-service basis. Most of the area hospitals and physicians "participate" in Goodlife's health insurance plan. When Sparks employees obtain health care services from participating healthcare providers, the providers are reimbursed for their costs directly by Goodlife. 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. Carol suggested that Mr. Green consider negotiating with physicians to lower the costs of the services provided. "I've 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. Ramirez 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 Goodlife's members. Mr. Green dismissed his staff. Eager to resolve this issue, he phoned your consulting company for assistance. Goodlife'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. Q. 2. The weekly utilization data is provided in the Excel data file on the BUS 302 website. Create scatter plots to show the relationships between the number of employees, number of visits per week, and total physician costs. Calculate visits per employee and the cost per visit for each week. 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 Sparks Interactive employee.

Week	Total Costs of Physician Visits	# Visits	# Employees
1	$80,226	416	4070
2	$80,804	438	4070
3	$77,446	419	4067
4	$75,671	422	4068
5	$77,597	419	4074
6	$77,433	447	4075
7	$77,423	445	4081
8	$79,952	467	4081
9	$78,789	472	4088
10	$79,737	474	4086
11	$82,691	461	4093
12	$83,212	496	4092
13	$83,541	499	4100
14	$83,271	499	4106
15	$82,528	506	4104
16	$88,641	511	4108
17	$83,601	515	4117
18	$86,125	465	4120
19	$83,418	484	4131
20	$86,254	513	4135
21	$94,600	510	4134
22	$97,484	515	4134
23	$102,667	535	4134
24	$101,294	520	4141
25	$102,876	532	4142