Gary Bentham, CFO Of Bartlett Community Hospital, Is Prepari

Gary Bentham Cfo Of Bartlett Community Hospital Is Preparing For Con

Gary Bentham, CFO of Bartlett Community Hospital, is preparing for contract negotiation with his largest nongovernmental payer, Antrim Healthcare. Antrim currently accounts for approximately 30% of all patient-care revenue at Bartlett and this percentage is growing. The current contract has been in force for 3 years and expires on June 30 of this year. Gary has given Antrim the required 180-day notification of his intent to terminate but is alarmed by the position taken by Antrim’s chief negotiator, Alice Mullins. Alice has told Gary that Antrim is unwilling to increase its present payment schedule beyond 5%.

Currently, Antrim pays for inpatient care on a diagnosis-related group (DRG) basis using the relative weights employed by the Centers for Medicare and Medicaid Services (CMS). The base payment for a case with a weight of 1.0 is $4,800. Gary knows that Medicare currently pays the hospital $6,500 for a case with a weight of 1.0. While the outpatient payment from Antrim is more reasonable, Gary is concerned about the hospital’s long-term financial position if the Antrim inpatient rate cannot be increased substantially. Alice has told Gary that she believes the current inpatient rate is reasonable because Medicare patients are much more resource intensive than Antrim’s younger patient population.

To test this hypothesis, Gary compared the average charge by DRG for Medicare traditional patients and Antrim’s patients. Gary was amazed at the similarity when the data analysis was completed. He discovered that on average, an Antrim patient consumed 94.5% of the resources of a traditional Medicare patient. Gary further concluded that because the average cost of a traditional Medicare patient with a case weight of 1.0 was $6,200, he would need a payment of $5,859 (0.945 x $6,200) from Antrim to break even. If Alice is serious about their maximum rate increase of 5%, then the best rate that Gary could expect would be $5,040 (1.05 x $4,800), which is well below his estimated cost.

Even after sharing his cost analysis with Alice, Alice remains firm in her position. The best inpatient rate that Antrim will offer is $5,040. She has said that any rate higher will jeopardize Antrim’s market position, either reducing margins or leading to a loss of market share. Gary must now decide on his hospital system’s stance with Antrim, considering that his system controls about 40% of the local capacity, with the remaining 60% held by a competitor.

Both systems have excess capacity, but it has narrowed recently due to hospital consolidations. Two major health plans also compete with Antrim, and both plans, as well as Antrim, have contracts with both hospital systems. Gary knows his current rates from these other plans are higher than Antrim’s, and he suspects Antrim’s rates to the competitor are even higher than they are to his hospital system.

Gary seeks to answer key questions: What is his marginal or incremental cost for the Antrim book of business? Could his competitor handle the same volume of Antrim patients and at what cost? And if his hospital system were excluded from Antrim’s network, what percentage of current Antrim volume would he retain? These questions are critical for shaping his negotiation approach with Alice and have significant implications for his hospital’s financial health.

Paper For Above instruction

The negotiation between Bartlett Community Hospital and Atrim Healthcare exemplifies the complexities hospitals face when negotiating reimbursement rates with dominant payers. The core issue revolves around establishing a sustainable and profitable payment rate that aligns with the hospital’s costs, while also considering market competitiveness and payer leverage. Understanding different payment methods, analyzing marginal costs, and evaluating alternative strategies are critical components of effective negotiation in healthcare finance.

Healthcare providers primarily operate under various payment models, including fee-for-service, bundled payments, cost-based reimbursement, and capitated rates. The fee-for-service model is prevalent in outpatient settings, where providers are reimbursed based on billed charges or negotiated fee schedules. Bundled payments, often tied to Diagnosis-Related Groups (DRGs), encompass a fixed payment per case, simplifying billing and encouraging cost containment. Cost-based reimbursement involves paying providers according to their costs, often through mechanisms like the reasonable cost standard used in Medicaid or Medicare. Capitated rates involve a fixed per-member per-month payment, aligning incentives towards efficiency and preventive care (Leibson & Corman, 2021).

In the case of Bartlett and Antrim Healthcare, the primary concern centers around DRG-based inpatient payments. The intractable issue is whether the hospital’s actual costs align with the negotiated rates—particularly when Antrim’s maximum offer is significantly below the hospital’s breakeven point. Gary’s analysis indicates that Antrim’s proposed rate covers only 81% of the estimated cost needed for breakeven, revealing an immediate liquidity risk. The hospital’s marginal costs, the additional expenses incurred for treating the last patient, are a key consideration in decision-making. These costs include variable expenses such as nursing care, pharmaceuticals, and diagnostics, which increase proportionally with patient volume, and fixed costs, which are less sensitive to patient volume in the short term.

Determining the marginal cost of serving Antrim’s patients requires analyzing the hospital’s cost structure. Typically, hospitals have high fixed costs due to infrastructure, staffing, and equipment, with variable costs forming a smaller proportion of total expenses. If the hospital’s variable cost per case is lower than the offered rate, it might still accept a lower rate temporarily, anticipating future volume growth or cross-subsidization. However, if the marginal cost exceeds the offered rate, continuing services risks financial losses.

Gary also contemplates whether his competitor could handle Antrim’s volume at a different cost structure. The second hospital’s capacity and cost efficiencies influence its ability to bid competitively. If the competitor can operate at a lower marginal cost, it could potentially undercut Antrim’s rates or serve as a strategic alternative for the hospital system. Analyzing their cost structure involves examining their fixed and variable costs, staffing efficiencies, and operational capacity.

Moreover, evaluating the market share retention potential if Bartlett were to withdraw from Antrim’s network is essential. Based on current market data, approximately 30% of revenue comes from Antrim, with 40% of total capacity controlled by Bartlett. If the hospital withdraws, it would potentially lose a significant portion of that revenue, unless patients switch to other providers or payers. Such a move could be risky, especially if competitors can absorb that volume at lower costs. The hospital must weigh short-term financial penalties against long-term strategic positioning.

Negotiating tactics should consider the hospital’s cost analysis, market power, and long-term strategic goals. Counteroffers might include proposing value-based contracts that reward efficiencies and quality metrics, or seeking volume guarantees that offset lower per-unit payments. Additionally, the hospital could explore alternative payers or diversify revenue streams to mitigate dependence on a single large payer like Antrim.

In conclusion, the hospital’s negotiation stance hinges on a detailed understanding of its incremental costs, the ability to serve Antrim’s volume profitably, and the strategic value of maintaining or withdrawing from the payer’s network. Effective negotiation will leverage cost data, market share considerations, and strategic priorities to arrive at a sustainable agreement that ensures financial viability while maintaining market competitiveness.

References

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