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?

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Answer 1

A

1	Scenario A	Scenario B
Number of SMI members	2,500	2,500
Visits per year per SMI member	2	2.6
Number of visits per year for all SMI members	5,000	6,500
Required primary care MDs	2.5	3.25
Annual cost of primary care MD	$150,000	$150,000
Primary care cost per member per year	$150	$195
Primary care cost per member per month	$12.50	$16.25

Scenario A:

$12.50 PMPM Yes; USG should accept the contract because it is $0.50 PMPM less than the $13 PMPM rate offered by SMI. The leaves a $0.50 PMPM rate to cover administrative costs.

Scenario B:

$16.25 PMPM No; USG should not accept the contract because it is $3.25 PMPM more than the $13 PMPM rate offered by SMI. $13 PMPM would not cover the total expected costs of care for all employees.

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B

For SMI members without chronic disease:
Number of SMI members without CD	2,400
Visits per year per SMI member without CD	1.58
Number of visits per year for SMI members without CD	3792
Required primary care MDs	0.00079
Annual cost of primary care MD	$150,000.00
Primary care cost per member without CD per year	$118.50
Primary care cost per member without CD per month	$9.88

For SMI members with chronic disease:
Number of SMI members with CD	100
Visits per year per SMI member with CD	12.08
Number of visits per year for SMI members with CD	1208
Required primary care MDs	0.00604
Annual cost of primary care MD	$150,000
Primary care cost per member per year	$906
Primary care cost per member per month	$75.50

The monthly difference is $65.62 PMPM when comparing the cost of SMI members without chronic disease to those with chronic disease.

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C

No; the best, most likely, and worst scenarios come out to $14.04 PMPM, $15.74 PMPM, and $17.64 PMPM respectively. All exceed the $13 PMPM premium offered, so accepting the contract would not be cost-effective.

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D

Members	2500
Months per year	12
Budget PMPM total	$40
Budget PMPM for primary care MDs	$13
Budget PMPM for specialist MDs	$27

Budget for primary care MDs	$390,000
Budget for specialist MDs	$810,000
Withhold percent	15%
Risk pool	$121,500
Budget after withhold for specialist MDs	$688,500
Actual (payments for) specialist MDs	$720,000
Variance from budget	$31,500
Remainder in risk pool	$90,000
Actual total for primary care MDs	$480,000
Actual PMPM for primary care MDs	$16.00
What is the actual primary care PMPM?	$16.00