Health Care Services Reimbursement
Case Assignment
Pearland Medical Center owns a small satellite clinic, specializing
in General Practice, located at nearby Pearland airport. General
Practice Clinic’s sole payor is Air Health, a health care plan that
covers the airport employee population. Air Health has been paying on a
fee-for-service basis; however, recently, its covered population
increased and it proposed a capitation contract for the next year with
an annual capitation payment of $150 for each of its 20,000 covered
members.
Previous experience indicates that the covered population will
average 2 visits per year to General Practice Clinic. General Practice
Clinic generates annually $1,150,000 fixed cost, which includes $550,000
in direct cost and $600,000 in allocated overhead. Each visit to
General Practice Clinic generates $45 in variable costs.
- Construct the base pro forma profit and loss statement on the capitation contract based on the number of visits for the clinic.
- What is the clinic’s contribution margin on the contract? What is
the clinic’s breakeven point under this capitation contract in the
number of visits? - Construct the base pro forma profit and loss statement on the capitation contract based on the number of members for the clinic.
- What is the clinic’s breakeven point under this capitation contract in the number of members?
- Should the clinic accept the contract terms?
- What elements of CVP analysis change when a clinic moves from a fee-for-service to a capitated environment?
- How do provider incentives change when it moves from a fee-for-service to a capitated contract?
Length: 3–4 pages, excluding title page and references.
Assignment Expectations
Assessment and Grading: Your paper will be assessed based on the
performance assessment rubric that is linked within the course. Review
it before you begin working on the assignment.
Your submission should meet the guidelines on file format, in-text
citations and references, scholarly sources, scholarly writing, and use
of direct quotes noted under Module 1 Assignment Expectations.
Required Reading
Berenson, R. A., & Rich, E. C. (2010). U.S. approaches to physician payment: The deconstruction of primary care. Journal of General Internal Medicine, 25(6), 613-618.
Chang, K. & Said, A.A. (2014). The impact of outsourcing on hospital performance. International Journal of Management Accounting Research, suppl. Special Issue. Health Care Costs and Performance, 4(1), 7-26.
Hennig-Schmidt, H., Selten, R., & Wiesen, D. (2011). How payment
systems affect physicians’ provision behavior – An experimental
investigation. Journal of Health Economics, 30(4), 637-646.
Expert Solution Preview
Introduction:
The following paper provides answers to a case assignment on Health Care Services Reimbursement. The case involves analyzing a capitation contract proposal from a health care plan, which covers the airport employee population. The General Practice Clinic located near the Pearland airport is approached by Air Health to accept a capitation contract with an annual capitation payment of $150 for each of its 20,000 covered members. The paper answers seven questions related to the case, including constructing a base pro forma profit and loss statement, calculating contribution margins and break-even points, analyzing CVP analysis elements, and assessing provider incentives when moving from a fee-for-service to a capitated contract.
Answer 1:
The base pro forma profit and loss statement can be constructed on the capitation contract based on the number of visits for the clinic. According to the question, the covered population will average 2 visits per year to the General Practice Clinic. The clinic generates annual fixed costs of $1,150,000, which includes $550,000 in direct costs and $600,000 in allocated overhead. Each visit to the clinic generates $45 in variable costs. Therefore, the total variable cost comes out to be $90 (45*2). The total revenue can be calculated by multiplying the number of covered members (20,000) with their annual capitation payment ($150). Hence, the total revenue generated will be $3,000,000 (20,000*150). The base pro forma profit and loss statement can be calculated as follows:
Total Revenue – Total Variable Cost – Fixed Cost = Profit/Loss
$3,000,000 – $90,000 – $1,150,000 = $1,760,000 (profit)
Answer 2:
The clinic’s contribution margin on the contract can be calculated by subtracting the total variable cost from the total revenue. Therefore, the contribution margin will be $2,910,000 (3,000,000-90,000). The clinic’s breakeven point under this capitation contract in the number of visits can be calculated by dividing the total fixed cost by the contribution margin per visit. The total fixed cost is $1,150,000, and the contribution margin per visit is $45. Hence, the breakeven point in the number of visits will be 25,556 (1,150,000/45).
Answer 3:
The base pro forma profit and loss statement can be constructed on the capitation contract based on the number of members for the clinic. The clinic has a covered population of 20,000 members. The fixed cost remains the same at $1,150,000, which includes $550,000 in direct costs and $600,000 in allocated overhead. The variable cost per member can be calculated by dividing the total variable cost by the number of visits per member. Each covered member will have two visits per year, so the variable cost per member will be $90 (45*2). Therefore, the total variable cost would be $1,800,000 (20,000*90). The total revenue can be calculated by multiplying the number of covered members (20,000) with their annual capitation payment ($150). Hence, the total revenue generated will be $3,000,000 (20,000*150). The base pro forma profit and loss statement can be calculated as follows:
Total Revenue – Total Variable Cost – Fixed Cost = Profit/Loss
$3,000,000 – $1,800,000 – $1,150,000 = $50,000 (profit)
Answer 4:
The clinic’s breakeven point under this capitation contract in the number of members can be calculated by dividing the total fixed cost by the contribution margin per member. The total fixed cost is $1,150,000, and the contribution margin per member is $60 (150-90). Hence, the breakeven point in the number of members will be 19,167 (1,150,000/60).
Answer 5:
Whether the clinic should accept the contract terms depends on its financial objectives and performance expectations. Based on the provided information, the clinic will generate a profit of $1,760,000 in the first year if it accepts the capitation contract. If the clinic predicts that the number of visits per patient will increase in the future or anticipates a higher covered population, accepting the contract could prove to be beneficial in the long run. However, if the clinic expects costs to increase, it should perform a sensitivity analysis to understand the potential impact on revenue and profitability.
Answer 6:
When a clinic moves from a fee-for-service to a capitated environment, several elements of CVP analysis changes. In a fee-for-service model, revenues are proportional to the number of visits or procedures conducted, whereas in a capitated model, revenues are fixed based on the number of covered members. Therefore, clinics need to manage costs effectively to prevent losses due to over-utilization or underutilization of services. The variable cost per visit decreases for the clinic when moving to a capitated environment, as covered members are entitled to two visits annually, whereas this is not the case in a fee-for-service model. Additionally, contribution margins may also change, which is an important indicator of profitability.
Answer 7:
Provider incentives change when moving from a fee-for-service to a capitated contract. In a fee-for-service model, physicians are incentivized to perform more visits, tests, or procedures as it generates higher revenue for the clinic. However, in a capitated model, physicians are incentivized to provide efficient and cost-effective care as the revenue is fixed. Therefore, providers need to focus on minimizing costs while still providing quality care. The capitation model encourages a team-based approach to care, where physicians and other healthcare professionals work together to meet the needs of the population. This shift in incentives can lead to improved quality of care and increased patient satisfaction.
