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Illustrative Case Model – Are You CMP™ Worthy?
The Hope Outreach Medical Clinic (HOMC) is a private, for-profit, single specialty medical clinic in a south-eastern state. It submitted its bi-annual Request for Proposal (RFP) to continue its current managed care fixed-rate contract. Upon review of the RFP, however, Sunshine Indemnity Insurance Company, the managed care organization (MCO), denied the contract request for the upcoming year.
Seeing Economic Estimates
In shock, the clinic’s CEO asked the clinic’s administrator to work with its legal team to develop a defensible estimate of economic damages that would occur as a result of the lost contract. The clinic intended to bring suit against the MCO for breach-of-contract. However, the administrator is not an attorney and is loathe to-enter the fray. After consideration however, he decided to assist in filing the Statement of Claim (SOC) because he realized that changes in patient services (unit) volume would be a valid economic surrogate. He then requested the following information from his controller, in order to develop a change in economic profit [damages] estimate.
Change in patient visits (unit) volume
- Fees (price) per patient (unit)
- Marginal (incremental) cost per patient (unit)
- Change in current fees (prices)
- Patient volume (units) affected
Key Issues:
- Fee (price) per patient (units) may be obtained from the fee schedule used by the MCO to pay HOMC.
- Marginal (incremental) costs per patient (unit) are approximated using variable costs.
- Higher cost payors exist because lower patient volumes raise the average cost per patient (unit) due to existing fixed costs.
Assessment
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Conclusion
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Filed under: "Advisors Only", "Ask-an-Advisor", "Doctors Only", CMP Program, Healthcare Finance, Managed Care, Practice Management | Tagged: capitation, economic profiling, fixed rate medical reimbursement contracts, HMO, Managed Care, marginal cost, marginal profit, marginal revenue, MCO, SOC |
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My Simple Solution:
The administrator’s financial work-product to estimate monetary damages and assist the legal team may be explained as follows.
Change in Profit Framework Estimate:
Change-in-Profit = Change in patient (unit) volume X [Fee (price per patient unit) – Incremental (marginal) cost per patient (unit)] – [Change in current price (fees) X Patient (unit) volume affected].
Responses are appreciated; as I enjoy your new “take the challenge” feature.
Thanks.
Joshua
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If the “fixed rate managed care contract” is a capitation agreement, then the cost per “member” per month is a critical component and very important to the MCO … and should be important to the provider.
The difference between “members” and “patients” who are members creating utilization is critical. If the provider is capitated to provide services to an assigned member population, then the parties should be discussing utilization of the provider services compared to capitation paid. Confusion over whether the contract is capitated or fixed rate fee-for-service makes specific resolution difficult.
Steve Sweetman
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