You are the chief negotiator for payor relations for Brady Hospital. Bad management has left the hospital

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Question:

You are the chief negotiator for payor relations for Brady Hospital. Bad management has left the hospital in very poor financial health, and at risk for closing. As a result, the hospital is currently being run by a three-person C-suite that includes an interim president and chief executive officer, an interim chief financial officer, and the incumbent chief medical officer. In an effort to bring in more patients and generate much-needed income, you are currently negotiating with Blue Cross Blue Shield of North Carolina (BCBSNC). The representative from BCBSNC is proposing these options for Brady Hospital to consider.

One option is for Brady Hospital to join the BCBSNC Health Maintenance Organization (HMO). If Brady joins the HMO, it will have a guaranteed income and be protected from future losses. 30% of the physicians, 23% of the nursing staff, 42% of the therapists, and 21% of the regular staff will be fired. While the rest of the staff will maintain their salaries, the remaining physicians will all be capitated at rates that will decrease their current salaries by 20-32%. That may help weed out the physicians, as some may decide to leave for other opportunities rather than taking a pay cut of this magnitude. If signed, this agreement will last five years, with BCBSNC able to extend the agreement for another five-year period. Brady Hospital has no veto power in this agreement.

A second option is to for Brady Hospital to become a preferred provider for BSBCNC, both with the PPO and POS plans. If Brady chooses to join in this provider network, it will be one of 37 hospitals in eastern North Carolina under agreement with BCBSNC. Therefore, it will be in direct competition with other hospitals, although there is not another hospital within 35 miles. Under this agreement, Brady will be able to take patients with any other health insurance, giving the hospital an opportunity to generate income. Outside of the BCBSNC agreement, this option represents no change to Brady’s current operations. Understanding Brady’s need for reliable, sustainable income, BCBSNC is willing to guarantee that Brady will generate $2,500,000.00 of income from BCBSNC patients per month, one-fifth of the hospital’s monthly liabilities. Should the hospital bill under $2.5 million worth of services for BCBSNC patients, BCBSNC will supplement the hospital’s income with the difference. However, if the hospital can bill BCBSNC for more than $4 million in a month, BCBSNC will only reimburse at 25% of those billables above $4 million. This agreement is good for one year. The agreement will automatically roll into a second one-year agreement, where the 25% reimbursement rate begins at $3.5 million of billables. After the second contract expires, either party can propose a continuation of the agreement with the guaranteed income dropping to $1.5 million and the 25% reimbursement rate continuing to be for all billables above $3.5 million. Alternatively, if the agreement is not extended, Brady Hospital will continue to be a preferred provider, and all fees will be billed according to a fee schedule that is more favorable to BCBSNC than Brady. It should also be understood that BCBSNC insures more than 67% in Brady Hospital’s region.

The hospital’s board of directors is voting on these options with BCBSNC next week.

They need your recommendation in white paper format. Your recommendation must be to take one of these options or neither of them. If you decide to not take one of these options, the decision must be to either continue to operate in the same fashion, hoping new leadership will turn things around, or close the hospital. You need to provide a rationale for your recommendation and suggest implications/conditions that are specific to your recommendation.