Answer only this question: What is the case trying to teach you?

GOODLIFE ZONE Goodlife Zone (Goodlife) is a managed care company that provides and finances health care services for employees of Sparks Interactive, Inc. Approximately 5,000 employees at Sparks Interactive, Inc. (Sparks) are currently enrolled in Goodlife's health insurance plan. The number of enrollees has increased over the past year as Sparks continued to expand its workforce, and more and more Sparks employees have elected to receive this benefit. Sparks currently pays Goodlife 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. Brad Green is the Director of Strategic Planning and Forecasting at Goodlife Zone. His key function is to direct the overall development and analysis of all strategic financial planning initiatives relating to Goodlife's managed care programs. His staff is involved in many activities, including preparing periodic reports of the costs incurred under the Sparks account. Every time a Sparks employee uses health care services, information about the type of service and the relevant costs are recorded in a database. Mr. Green recently directed his staff to perform a financial analysis of the current utilization and costs incurred under the Sparks account. Bad News Clara Davis personally delivered her summary of utilization on the Sparks account to Mr. Green (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 Sparks employees' use of outpatient physician services has been going up for the past six months. What's going on?" He asked Ms. Davis 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. Green was concerned about Goodlife's profitability. Last year, Goodlife negotiated with Sparks to charge a fixed premium of $260 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 Goodlife. The Sparks contract would expire next month, at which time Goodlife would need to renegotiate the terms of its contract with Sparks. Mr. Green feared that Goodlife would have to request a sharp rate increase to remain profitable. Goodlife's monthly cost of administering the health plan was fixed, but the increases in the use of health care services were eroding Goodlife'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. Green called in the rest of his staff to assist him in devising a strategy for renegotiating the Sparks account. "If possible, I would like to figure out how we can continue providing this service for the rate we established last year. I'm afraid if we attempt to increase the per member premium, Sparks will contract with another health insurer. What other options do we have?" Manny Ramirez, 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 Goodlife's competitors are increasing their use of these mechanisms, which include copayments, waiting periods, preauthorization requirements, and exclusions on certain health care services. 1 "One of the problems, in my opinion, is that the Sparks employees have nearly full coverage for all their health care services," remarked Ramirez. "The Sparks employees should pay some part of their health care services out-of-pocket, so that they share an incentive to stay healthy. Goodlife only charges a $15 copayment, but many other health insurance plans require that enrollees pay $2025 for each physician's 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. Green consider implementing a larger copayment for each physician visit when the contract with Sparks is renegotiated. Francesca Carol, 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." Goodlife currently pays for health care services on a fee-for-service basis. Most of the area hospitals and physicians "participate" in Goodlife's health insurance plan. When Sparks employees obtain health care services from participating healthcare providers, the providers are reimbursed for their costs directly by Goodlife. 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. Carol suggested that Mr. Green consider negotiating with physicians to lower the costs of the services provided. "I've 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. Ramirez 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 Goodlife's members. Mr. Green dismissed his staff. Eager to resolve this issue, he phoned your consulting company for assistance. Goodlife'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 Goodlife's current financial situation and include an evaluation of the two options for controlling costs on the Sparks account. Use the guidelines for writing a report on the course website. You may wish to review the following LDC Concepts: Microeconomics 3 and 5, Statistics 1, 4, and 7. Q. 1. Using only the information provided in Exhibit 1, explain why further analysis of physician visits maybe 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 $260 premium using a pie chart. Does the allocation of the $260 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 on the BUS 302 website. Create scatter plots to show the relationships between the number of employees, number of visits per week, and total physician costs. Calculate visits per employee and the cost per visit for each week. Calculate the mean and standard deviation for these measures for this six-month period. Explain how these statistics are useful in understanding the trend in total outpatient physician costs per Sparks Interactive 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. Green in making his decision. Q. 4. Mr. Ramirez 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. Green 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. Green 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. Green consider this approach? Discuss the ethical considerations. Exhibit 1 Monthly Report of Health Care Utilization Total Costs Incurred - Sparks Interactive, Inc. Number of members, July 31, 2006: 4129 Number of members, August 31, 2006: 4137 Exhibit 2 Data file has been provided on the course website. Exhibit 3 Sample Means for Annual Use of Health Care Services Source: "Demand for Health Care Services at Different Copayment Levels: Results Based on a National Study of Health Insurance Enrollees