Hospital Costs, Volume and Discounts

1. Hospital Costs, Volume and Discounts

2. Systems Framework for Understanding Managed Care EMPLOYERS Plan Choices, Employee Premiums, Information Contract for Product, Premiums/Benefits, Risk Marketing, Product Development Job preferences, Wage and Benefit Preferences Payment, Risk, Practice Guidelines, Profiling MCO Type of Plan, Philosophy and Procedures for Selection/Retention Member services Utilization management Select Products, Join Plan CARE Provider Network PHYSICIANS CONSUMERS Enrollees Marketing, Advertising, Information, Reputation Specialty, Style of Care, Discounts, Form of Organization Taxes, Votes Contract for Product, Risk, Premiums, Benefits Discounts, Specialized Services Employee Plans, Medicare, Medicaid, Information Treatment Facilities and Prescribed Services Customer Volume Admissions, Prescriptions, Referrals Regulate Allowed Products, Behavior Relationships GOVERNMENT HOSPITALS & OTHER SUPPLIERS Adapted from Gold , Medical Care Research and Review52(3): 307-341, Figure 1.

3. Plan for Today • Fixed costs and variable costs • Relationship of average fixed costs to • Occupancy rates • Profitability • Hospital’s willingness to make volume discounts • Professor’s Checkpoint • Hospital contracting scenario to analyze

4. Total costs = Fixed costs + Variable costs $$$ $700 $700 $700 $700 $700

5. Total Costs = Fixed Costs + Variable Cost Per Day * Days Days Days Avg. Cost per Day Avg.Cost per Day Avg.Fixed Cost per Day Variable Cost per Day = + $1300 = $600 + $700

6. As number of days increases • Avg. Fixed Costs per Day go down Fixed Costs Days • Avg. Total Costs per Day also go down • Avg. Total Costs = Avg. Fixed Costs + Variable Cost Per Day

7. Occupancy rate = Number of patients/number of beds (proportion of beds that are filled) Occupancy rate Avg. cost per day Occupancy rate Avg. cost per day

8. Profitability • Profit per day = Revenue per day - Cost per day • Profit margin = Share of revenue that is profit Occupancy Avg. Cost per Day Profit Occupancy Avg. Cost per Day Profit

9. Bedrock Hospital • Average charge per day = $1300 • Profit margin is 10% • Fixed costs are $600 per day • Variable costs are $_______ per day What is the lowest daily rate that your HMO should be able to negotiate with Bedrock?

10. Fixed costs are a significant feature of hospital finance. • One-third to one-half of the costs are fixed • The rest are are variable • Makes hospitals very sensitive to occupancy rates • Hospitals may be willing to discount below avg. total cost--in return for higher volume

11. Scenario