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. “N o 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 use d 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.

“O ne 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 -

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 website.

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.

Now, let’s look into the six months of data provided for us and simulate the profitability of the physician services department if copayments are increased to $20 - $25 per visit. Our calculations will be listed in the chart below:

Question:

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 the table above. (Use algebra to calculate) Consider the pros and cons of each approach.

Exhibit 1

Monthly Report of Health Care Utilization

Total Costs Incurred - 101App, Inc.

Category of Service	July 2006	August 2006
Hospital Services – Inpatient	203,425	212,250
Hospital Services – Outpatient	182,440	180,700
Surgical Services	101,250	103,400
Physician Office Visits	337,900	391,450
Administrative Expenses	90,000	90,000
TOTAL	915,015	977,800

Number of members, July 31, 2006: 4129

Number of members, August 31, 2006: 4137

Exhibit 2

Datafile has been p rovided 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

Exhibit 3

Sample Means for Annual Use of Health Care Services

Copayment Level	Physician Visits Per Capita
$10	6.3
$15	6.0
$20	5.7
$25	5.4
$30	5.1
$35	4.8

Source: “Demand for Health Care Services at Different Copayment Levels

Answer rating: 100% (QA)

The size of a copayment and the number of visits to a clinic have historically been shown to have a ... View the full answer