Some Thoughts on the Marginal Healthcare Dollar

Posted on February 16, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

Can this Vital Buck be More Efficiently Used?

By Dr. David Edward Marcinko MBA CMP™

[Editor-in-Chief]

Recently, healthcare economist Austin Frakt PhD offered these points about healthcare dollars spent on the margin:

1. Spending on health is not without value. It does improve lives [See Cutler]. Yet, we spend much to get that value.

2. Price per QALY is very high [See Aaron’s series on spending and his other on quality).

3. Just staying within the realm of health, the price per QALY on another “service” might be a lot lower [like nutrition, exercise, and healthy habits, etc].

http://theincidentaleconomist.com/wordpress/could-the-marginal-health-care-dollar-be-put-to-better-use/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheIncidentalEconomist+%28The+Incidental+Economist+%28Posts%29%29

Note: The quality-adjusted life year (QALY) is a measure of disease burden, including both the quality and the quantity of life lived. It is most often used in assessing the value for money of a medical intervention. The QALY model requires independent utility, neutral risk and constant proportional tradeoff behavior.

Understanding Marginal Profit

Recalling the equation: Profit = (Price x Volume) – Total Costs

We could amend it and say that:

Total Profit = P x V – (FC + VC) or: Total Profit = Price x Volume – (Fixed Costs + Variable Costs)

However, most medical office or clinic contracts today are based not on total profit, but on additional or marginal profit, because overhead costs always remain and clinic fixed costs are not important in contracted medicine.

And, for other pricing decisions, the equation can again be re-written, to emphasize variable costs, as follows: Marginal Profit = (P x V) – VC.

In other words, the marginal benefit must exceed the marginal cost of practice.

Cost-Volume-Profit Analysis

Now, once a basic understanding of marginal profit and medical cost behavior is achieved, the techniques of cost-volume-profit analysis (CVPA) can be used to further refine the managerial cost and profit aspects of the medical office business unit. CVPA is thus concerned with the relationship among prices of medical services, unit volume, per unit variable costs, total fixed costs, and the mix of services provided.

Assessment

Austin felt that if [*]od were jointly designing all health-related systems and functions of society and government – He’d look at the marginal cost/QALY over all possible ways to spend the next dollar and pick the smallest. How about you?

But, it’s not always going to be on health care services and it probably isn’t given what we’re already spending for those and what we’re getting for that spending.

Conclusion

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Take the Lost Managed Care Contract Challenge!

Posted on September 14, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

Illustrative Case Model – Are You CMP™ Worthy?

By Staff Reporterscmp-logo

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

  1. Fees (price) per patient (unit)
  2. Marginal (incremental) cost per patient (unit)
  3. Change in current fees (prices)
  4. Patient volume (units) affected

Key Issues:

  1. Fee (price) per patient (units) may be obtained from the fee schedule used by the MCO to pay HOMC.
  2. Marginal (incremental) costs per patient (unit) are approximated using variable costs.
  3. Higher cost payors exist because lower patient volumes raise the average cost per patient (unit) due to existing fixed costs.

Assessment

Medical management consultants, are you up to answering this challenge? We dare you to respond!

Visit: www.CertifiedMedicalPlanner.com

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

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