InterCon Travel Health is a Toronto-based company that provides services to health insurers of foreign tourists who travel to the United States and Canada.7 As described in the Guided Example in this chapter, the primary focus of InterCon is to act as an interface between local health providers and the overseas insurance company who insured the tourist should the traveler find himself or herself in need of medical attention. The customer base of sick or injured tourists is potentially profitable because most tourists who fall ill require only minor treatment and rarely come back for expensive follow-up visits. Therefore, InterCon can pass savings along to the foreign insurer by facilitating claim management and payment and can collect processing fees from these insurance companies in return.
Currently, this Canadian company charges a processing fee of 9.5% (collected partly from the medical providers and partly from the foreign insurers) and has experienced an average annual growth rate of 3%. However, a back-log of claims and a cyclical pattern to the claims (due to high tourist seasons) has caused a delay in filing claims with the foreign insurers, resulting in a number of noncollectible claims. In addition, while the growing company has been trying to keep costs to a minimum, they are considering adding a new information technology system to help them streamline the process. Most of the company€™s revenue comes from claims for inpatient hospital stays, which average approximately $10,000. These claims represent 20% of InterCon€™s claims, but over 80% of its claim revenue. The remaining claims arise from clinic and emergency room visits. Currently, the company has about 20,000 annual claims, so the associated revenue is estimated to be as follows.

To help with rising costs, this firm may consider raising the processing fee as high as 11.0%. While this would generate additional revenue, the firm would also incur the risk of losing contracts with insurers and health care providers. Here are estimates of the impact of a change in rates on the annual growth in claims depending on the strength of foreign tourism (reverse of the strength of the U.S. economy) for the 9.5% processing fee rate. Find the payoffs (total revenue) for the 11.0% fee rate based on the preceding table and the growth rates provided.

What is the expected revenue for the respective fee alternatives based on the growth rate and total income from claims and fees? Suppose the manager gets new information and revises the probabilities for the strength of tourism to be even at 50-50. What are the new values for expected revenue, CV, and return to risk ratio?

Average Claim #Claims 96 of Claim Revenue %of Fee Fees Amount (SM) Total Rate (SM) Claim Class byClass Class A Class B Class C Total (Annual20000 4000 20% $10000 $40.0 85% 95% $3.8 6000 30% $1000 10000 50% $100 $1.0 2% 9.5% $0.095 $6.0 13% 9.5% $0.57 $47.0 $4.465 Processing Fee Rate at 9.5% Processing Fee Rate at 11.0% Foreign Tourism Probability Growth Rate Payoff (S) Growth Rate Payoff () Weak Strong 54069129 0.40 0.60 3% 1% 27 4% 56231894 3% 7?