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4. Mr. Lucas referred to a national study of copayment levels. The important results of this study are provided in Exhibit 3.

a. Calculate the price elasticity of demand for physician visits at each copayment level using the arc method. What does the data tell you about the price elasticity of demand for physician visits? How does this information help Mr. Fleming in making his decision?

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b. Using the six months of data provided in the Excel data file, simulate the profitability of the physician services department if copayments are increased to $20 per visit. Repeat your analysis using a copayment of $25 per visit.

Please make sure you read the case and answer the questions based on the case. Also, check slides 8 and 9 to refer your answers to it. Provide charts to each answer to show the work.

BRIGHTFORM, INC. BrightForm, Inc. (BFI) is a managed care company that provides and finances health care services for employees of 101App, Inc. Approximately 5,000 employees at 101App are currently enrolled in BFI’s health insurance plan. The number of enrollees has increased over the past year as 101App continued to expand its workforce, and more and more 101App employees have elected to receive this benefit. 101App currently pays BFI 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. Robert Fleming is the Director of Strategic Planning and Forecasting at BrightForm, Inc.. His key function is to direct the overall development and analysis of all strategic financial planning initiatives relating to BFI’s managed care programs. His staff is involved in many activities, including preparing periodic reports of the costs incurred under the 101App account. Every time a 101App employee uses health care services, information about the type of service and the relevant costs are recorded in a database. Mr. Fleming recently directed his staff to perform a financial analysis of the current utilization and costs incurred under the 101App account. Bad News Hanna Brooks personally delivered her summary of utilization on the 101App account to Mr. Fleming (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 101App employees’ use of outpatient physician services has been going up for the past six months. What’s going on?” He asked Ms. Brooks 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. Fleming was concerned about BFI’s profitability. Last year, BFI negotiated with 101App to charge a fixed premium of $250 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 BFI. The 101App contract would expire next month, at which time BFI would need to renegotiate the terms of its contract with 101App. Mr. Fleming feared that BFI would have to request a sharp rate increase to remain profitable. BFI’s monthly cost of administering the health plan was fixed, but the increases in the use of health care services were eroding BFI’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. Fleming called in the rest of his staff to assist him in devising a strategy for renegotiating the 101App account. “If possible, I would like to figure out how we can continue providing this service for the rate we established last year. I am afraid if we attempt to increase the per member premium, 101App will contract with another health insurer. What other options do we have?” John Lucas, 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 BFI’s competitors are increasing their use of these mechanisms, which include copayments, waiting periods, pre-authorization requirements, and exclusions on certain health care services. “One of the problems, in my opinion, is that the 101App employees have nearly full coverage for all their health care services,” remarked Lucas. “The 101App employees should pay some part of their health care services out-of- 1 pocket, so that they share an incentive to stay healthy. BFI only charges a $15 copayment, but many other health insurance plans require that enrollees pay $20 – 25 for each physician 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. Fleming consider implementing a larger copayment for each physician visit when the contract with 101App is renegotiated. Miranda Cook, 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.” BFI currently pays for health care services on a fee-for-service basis. Most of the area hospitals and physicians “participate” in BFI’s health insurance plan. When 101App employees obtain health care services from participating health care providers, the providers are reimbursed for their costs directly by BFI. 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. Cook suggested that Mr. Fleming consider negotiating with physicians to lower the costs of the services provided. “I have 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. Lucas 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 BFI’s members. Mr. Fleming dismissed his staff. Eager to resolve this issue, he phoned your consulting company for assistance. BFI’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. Required: Prepare a report of BFI’s current financial situation and include an evaluation of the two options for controlling costs on the 101App account. Use the guidelines for writing a report on the course web site. You may wish to review the following LDC Concepts: Microeconomics 3 and 5, SOM 1, 4, and 7. Exhibit 1 Monthly Report of Health Care Utilization Total Costs Incurred - 101App, Inc. Category of Service Hospital Services– Inpatient Hospital Services – Outpatient Surgical Services Physician Office Visits Administrative Expenses TOTAL July 2006 203,425 182,440 101,250 337,900 90,000 915,015 Number of members, July 31, 2006: 4129 Number of members, August 31, 2006: 4137 2 August 2006 212,250 180,700 103,400 391,450 90,000 977,800 Exhibit 2 Datafile has been provided in “BrightForm - Student Data Spreadsheet” Week Total Costs of Physician Visits ($) # Visits # Employees 1 77,322 401 4,065 2 79,177 423 4,065 3 74,888 404 4,062 4 73,428 407 4,063 5 74,535 404 4,069 6 75,487 432 4,070 7 74,222 430 4,076 8 75,499 452 4,076 9 76,300 457 4,083 10 76,033 459 4,081 11 78,832 446 4,088 12 79,755 481 4,087 13 80,243 484 4,095 14 78,993 484 4,101 15 81,227 491 4,099 16 84,219 496 4,103 17 82,177 500 4,112 18 82,456 450 4,115 19 81,100 469 4,126 20 84,211 498 4,130 21 90,133 495 4,129 22 95,120 500 4,129 23 99,865 520 4,129 24 97,752 505 4,136 25 98,713 517 4,137 3 Exhibit 3 Sample Means for Annual Use of Health Care Services Copayment Level $10 $15 $20 $25 $30 $35 Physician Visits Per Capita 6.3 6.0 5.7 5.4 5.1 4.8 Source: “Demand for Health Care Services at Different Copayment Levels: Results Based on a National Study of Health Insurance Enrollees” 4 BRIGHTFORM, INC. – QUESTIONS Use the guidelines for writing a report on the course web site and use the following questions as a guide: Q. 1. Using only the information provided in Exhibit 1, explain why further analysis of physician visits may be needed. Compare the profitability of hospital and surgical services to physician services, using the allocation of revenue that was given. Show the breakdown of the $250 premium using a bar chart. Does the allocation of the $250 per employee per month payment across the types of health care services seem reasonable, given the past two months’ utilization? Q. 2. The weekly utilization data is provided in the Excel data file. 2.1 Create scatter plots to show the relationships between the following: • • • The total cost of physician visits vs. number of employees The number of employees vs. number of visits Total cost for physician visits vs. number of visits 2.2 Calculate visits per employee and the cost per visit for each week (two new columns.) 2.3 Calculate the mean, standard deviation and coefficient of variation for all measures. 2.4 Explain how these statistics in 2.3 are useful in understanding the trend in total outpatient physician costs per 101App employee. Q. 3. Regression analysis can be useful to tease out the importance of various factors in explaining costs. a. Evaluate the relationship between visits per week and week. Interpret your regression results by discussing the significance of the regression equation and the magnitude of the estimated coefficients. b. Evaluate the relationship between cost per visit and week. Interpret your regression results by discussing the significance of the regression equation and the magnitude of the estimated coefficients. c. Compare the results from the two regressions and explain how they can be used to help Mr. Fleming in making his decision. Q. 4. Mr. Lucas referred to a national study of copayment levels. The important results of this study are provided in Exhibit 3. a. Calculate the price elasticity of demand for physician visits at each copayment level using the arc method. What does the data tell you about the price elasticity of demand for physician visits? How does this information help Mr. Fleming in making his decision? b. Using the six months of data provided in the Excel data file, simulate the profitability of the physician services department if copayments are increased to $20 per visit. Repeat your analysis using a copayment of $25 per visit. Q. 5. Using the six months of data provided in the Excel data file, calculate the percentage reduction in physician payments that would be required to achieve the same level of profits as in Q.4.b. Q. 6. In addition to the options suggested by his staff, Mr. Fleming recently read an article about rationing health care services as a method of controlling costs. The general idea of rationing is that more expensive treatments are excluded so that basic health benefits can be provided to a wider population. Health plans can implement rationing by limiting the types of services they will cover. While they commonly exclude coverage for experimental treatments and cosmetic surgery, many are now considering adding physical therapy, mental health services, and therapies that treat fatal conditions to the list of excluded services. Would you recommend that Mr. Fleming consider this approach? Discuss the ethical considerations. Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Total Costs of Physician Visits ($) 77,322 79,177 74,888 73,428 74,535 75,487 74,222 75,499 76,300 76,033 78,832 79,755 80,243 78,993 81,227 84,219 82,177 82,456 81,100 84,211 90,133 95,120 99,865 97,752 98,713 # Visits 401 423 404 407 404 432 430 452 457 459 446 481 484 484 491 496 500 450 469 498 495 500 520 505 517 # Employees 4,065 4,065 4,062 4,063 4,069 4,070 4,076 4,076 4,083 4,081 4,088 4,087 4,095 4,101 4,099 4,103 4,112 4,115 4,126 4,130 4,129 4,129 4,129 4,136 4,137 BrightForm, Inc.: Coaching Notes 1 Managed Care – the Facts ? ? Companies usually pay a managed care plan a monthly premium, based on the number of employees. Managed care plans use the premium to cover payments to health care providers, administrative costs, and profit. BFI’s current contracts with providers involve fee-for-service payment. ? ? Physicians and hospitals are paid their asking fee for each patient visit or service. For physician visits, employees only pay the deductible, which is currently $15/visit. 2 Question 1: Table 1 Data Has spending on physician services really gone up much more than in other areas? ? Calculate Percent Change for each category: = (New Value – Old Value) Old Value ? 3 Question 1: Allocation of Premium $ ? The managed care plan allocates premium income across functional areas. ? Hospital services may involve different claims and payment procedures. ? Managers in these areas set up different budgets and use different mechanisms to control the use of services. ? Calculate the % of total costs for each category – how do these compare to the allocations? 4 Question 2: Sample Statistics and Scatter Plot ? ? ? Create two new variables: visits/employee and cost/visit. How do these compare over time? Calculate means and standard deviations: consider confidence intervals for these variables. Scatter Plots: ? ? Instructions for making scatter plots with Excel are on the Materials section of BUS 302 web site. There are instructions for Excel 2010 and Excel 2013. Be sure to use the appropriate instructions. 5 Question 3: Regression Analysis ? Evaluate the time trends in visits per week and cost per visit. ? Use regression. ? ? Instructions are in the Materials section of the BUS 302 web site for both Excel 2010 and Excel 2013. Be sure to correctly identify the X and Y variables. 6 Question 3: Regression Analysis ? Coefficient of Determination – (R2) ? ? Regression Coefficients ? ? The percent of variation in the dependent variable (Y) accounted for by variation in the independent variable (X). The closer to 1 the better. Coefficient on x-variable measures the slope of the trend Line. (Positive Sign - Positive Relationship, Negative Sign – Negative Relationship) t-statistic and p-value are used to indicate the observed level of significance. 7 Question 4: Elasticity of Demand ? ? ? Calculate the Arc Price Elasticity of Demand ?Q 1 (Q1 + Q2 ) ed = 2 ?P 1 ( P1 + P2 ) 2 Is demand for physician services elastic or inelastic? Explain. See the discussion of elasticity on the course website: LDC-Microeconomics Review 8 Question 4: ? Note: a change in the deductible has two effects: Reduces the number of visits per employee ? Reduces the cost per visit by $5 ? Estimate new level of visits for each ? 9 Question 5: Evaluation of Alternatives How much of a rate reduction (%) is required of physicians, to meet your target? ? Consider the pros and cons of each approach. ? 10 Question 6: Rationing? Consider the ethical implications of restricting the use of services. Compare to expected results of the other possible approaches. ? Why not just increase the premium? ? Other considerations?