Ulysses S. Grant (USG) is a nonprofit HMO that is preparing a premium bid for Stewart Martha Inc.
(SMI), a major employer in USG's service area with 2,500 members. USG uses the cost approach to
estimate primary care physician's costs for SMI's members. On average, each member makes two visits
to a primary care physician per year, and each primary care physician can handle 2,000 patient visits per
year. Total compensation per primary care physician is $150,000 per year.
a. SMI has obtained primary care bids from other HMOs in the other area and has told USG that it can
have the primary care contract for a PMPM premium of $13.00. Should USG accept the contract?
Suppose that each member makes 2.6 visits to a primary care physician per year. Should USG accept
the contract?
b. Suppose that the average of two visits to a primary care physician per year is a weighted average of two
groups of SMI membersa small group with a chronic disease that requires a higher frequency of visits
and a large group without a chronic disease that requires a lower frequency of visits:
						Average
						primary care
					Number	visits per year
	Members without chronic disease				2,400	1.58
	Members with chronic disease				100	12.08
	Total				2,500	2
Compare the primary care cost per member per month of the group of SMI members without a chronic
disease to the group with a chronic disease. What information do these two numbers provide?
c. The primary care physicians believe they are overworked and underpaid. Their association is demanding
that the total compensation per primary care physician be increased and the expected workload of each
primary care physician be reduced. Management believes that the following settlements are possible:
			Total comp	Visits
			per MD	per MD
			per year	per year
	Best case		$160,000	1,900
	Most likely case		$170,000	1,800
	Worst case		$180,000	1,700
Should USG still accept the contract?
d. Suppose USG decides to submit a premium bid to MSI of $40 PMPM for both primary and specialty
physicians. The primary care physicians will be paid $13 PMPM; the specialty physicians will be paid
on a discounted fee-for-service basis. To create proper incentives, USG establishes a professional
services risk pool equal to 15 percent of the budget for specialist physicians. After reconciliation
at the end of the year, any funds left in the risk pool are evenly split among all primary care physicians.
If the actual payments to the specialist physicians total $720,000 during the year, what would a primary
care physician's actual PMPM be after reconciliation at the end of the year?