Question

Ulysses S. Grant (USG) is a nonprofit HMO that is preparing a premium bid for Stewart Martha Inc. (SMI), a major employer in USG's service area with 2,500 members. USG uses the cost approach to estimate primary care physician's costs for SMI's members. On average, each member makes two visits to a primary care physician per year, and each primary care physician can handle 2,000 patient visits per year. Total compensation per primary care physician is $150,000 per year.

a. SMI has obtained primary care bids from other HMOs in the other area and has told USG that it can have the primary care contract for a PMPM premium of $13.00. Should USG accept the contract? Suppose that each member makes 2.6 visits to a primary care physician per year. Should USG accept the contract?

b. Suppose that the average of two visits to a primary care physician per year is a weighted average of two groups of SMI members–a small group with a chronic disease that requires a higher frequency of visits and a large group without a chronic disease that requires a lower frequency of visits:

	Number	Average primary care visits per year
Members without chronic disease	2,400	1.58
Members with chronic disease	100	12.08
Total	2,500	2.00

Compare the primary care cost per member per month of the group of SMI members without a chronic disease to the group with a chronic disease. What information do these two numbers provide?

c. The primary care physicians believe they are overworked and underpaid. Their association is demanding that the total compensation per primary care physician be increased and the expected workload of each primary care physician be reduced. Management believes that the following settlements are possible:

	Total comp per MD per year	Visits per MD per year
Best case	$160,000	1,900
Most likely case	$170,000	1,800
Worst case	$180,000	1,700
Should USG still accept the contract?

d. Suppose USG decides to submit a premium bid to MSI of $40 PMPM for both primary and specialty physicians. The primary care physicians will be paid $13 PMPM; the specialty physicians will be paid on a discounted fee-for-service basis. To create proper incentives, USG establishes a professional services risk pool equal to 15 percent of the budget for specialist physicians. After reconciliation at the end of the year, any funds left in the risk pool are evenly split among all primary care physicians. If the actual payments to the specialist physicians total $720,000 during the year, what would a primary care physician's actual PMPM be after reconciliation at the end of the year?

Answer 1

a. Cost of PMPM premium if the on an average each member makes two visits (2) per year.

= 2/2000 = 0.001

= 0.001* $150,000 = $150

= 150/12 = $12.50 PMPM

Cost PMPM Premium if the visits becomes 2.6 per year

= 2.6/2000 = 0.0013

0.0013 * 150000 = $195

195/12 = $16.25 PMPM

The Ulysses S Grant must accept the project with 2 visits per year, as the PMPM premium they are offering is $13 which is more than the $12.5 (2visits per year)

The Ulysses S Grant must reject the project with 2.6 visits per year, as the PMPM premium they are offering is $13 , which is less than the required of $16.25 (2.6 visits per year)

b. Let us try to find out:

Members without Chronic Disease:

= 1.58 /2000 = 0.00079

= 0.00079 * $150,000 = $118.5

= 118.5/12 = $9.88 PMPM

Lets find out for Members with chronic disease:

12.08/2000 = 0.00604

= 0.00604 * $150,000 = $906

= $906/12 = $75.50 PMPM

From the above calculation it is clear how there is a severe cost impact by patients with chronic disease than to the members without chronic disease. The members without chronic disease have a cost of $9.88 PMPM, as compared to the members with chronic disease of $75.50 PMPM.

c. Let us try to analyse the case with all the three scenarios:

Best Case Scenario :

2/1900 = 0.00105

= 0.00105 * 160000 = $168

168/12 = $14 PMPM

Most Likely scenario:

= 2/1800 = 0.00111

= 0.00111 * $170000 = $188.70

= 188.70/12 = $15.73 PMPM

Worst Case:

= 2/1700 = 0.001176

= 0.001176/$180,000 = $211.68

= 211.68/12 = $17.64 PMPM

After Analysing all the scenarios, we can straighaway see that the PMPM cost is much higher in al the three scenarios, even in the best case scenario, the cost is $14, which is higher than $13 PMPM.

d. After reconciliation for the year:

Members: 2500

Budgeted PMPM total = $40

Budgeted PMPM for primary care MD= $13

Budgeted PMPM for speciality care MD = $27

Budget for Primary care MDs = $390,000

Budged for Specialist care MDs = $810,000

Withold Percentage = 15%

Risk Pool = $121,500

Budget after withold for specialist MDs = $688,500

Actual Specialist MDs = $720,000

Variance from budget = $688,500 - $720,000 = - $31,500

Remainder in risk pool = $90,000

Actual total for primary care MDs = $480,000

Actual PMPM for primary care MDs = $16