Nursing Home Contracts With An HMO For Skilled Nursing Care ✓ Solved
A Nursing Home Contracts With An Hmo For Skilled Nursing Care At 300
A nursing home contracts with an HMO for skilled nursing care at $3.00 per member per month (PMPM). If costs are expected to average $120 per day, what is the maximum utilization of days per 1,000 members that the nursing home can experience before it begins to lose money? Please show all your work / calculations to receive credit. Part 2 - Refer to the table below for problems 1-5. A hospital and a health plan are negotiating a contract for inpatient medical–surgical care.
Calculate the amounts that would complete the table below. (Please refer to chapter 7 if necessary).
Table: Per Member Per Month (PMPM) Rate
- Cost per 1,000: 400
- Annual Frequency: $1,000
- Unit Frequency: (Q)
- Cost: (Q2)
- Use the information from questions 1-3 in solving questions 4 and 5.
- Assume that you are the hospital administrator and that the health plan has offered you a capitated contract at the PMPM rate that you computed in question 1.
- You believe, however, that you can control utilization better than is reflected in the table above.
- You believe the actual utilization will be 370 per 1,000 persons.
- The number of covered lives is 25,000.
- Your cost per case is $1,100. (Ignore marginal costs, contribution margins, etc.)
Sample Paper For Above instruction
Introduction
Managing and negotiating healthcare contracts requires detailed understanding of costs, utilization, and revenue calculations. The scenarios presented involve determining maximum utilization rates for a nursing home under capitation and analyzing hospital contract rates based on given parameters. This paper provides a comprehensive analysis of these scenarios, including step-by-step calculations and insights into healthcare financial management.
Part 1: Nursing Home Contract Analysis
The initial scenario involves a nursing home contracting with an HMO for skilled nursing care at a fixed rate of $3.00 PMPM. The key question is: What is the maximum number of days per 1,000 members that the nursing home can serve before incurring a loss if the average cost per day is $120?
Calculating Maximum Utilization
To find the maximum utilization days, we need to compare total revenue and total costs.
Step 1: Determine Revenue Per 1,000 Members
Total revenue per 1,000 members is calculated as:
\[
\text{Revenue} = \text{PMPM rate} \times 1,000 = 3.00 \times 1,000 = \$3,000
\]
Step 2: Calculate Total Cost for the Nursing Home
Average cost per day is $120, so for each day of utilization:
\[
\text{Total cost per day} = 120
\]
Total cost for the number of days (D) per 1,000 members:
\[
\text{Total cost} = 120 \times D
\]
Since the nursing home breaks even when revenue equals costs:
\[
\$3,000 = 120 \times D
\]
\[
D = \frac{3,000}{120} = 25 \text{ days}
\]
Conclusion for Part 1
The nursing home can serve up to 25 days per 1,000 members before it begins to lose money.
Part 2: Hospital Contract Negotiation and Utilization Analysis
The second part involves calculating the PMPM rate, copay, net rate, total revenue, and profitability under different utilization assumptions.
Given Data Summary
- Cost per case: $1,100
- Number of covered lives: 25,000
- Actual utilization: 370 cases per 1,000 persons
- Contract rate (initially): to be calculated
- Utilization control: hospital expects 370 cases/1,000
Question 1: Calculating the PMPM Rate
First, determine the total annual cost for the hospital.
Total cases:
\[
\text{Cases} = 25,000 \times \frac{370}{1,000} = 25,000 \times 0.370 = 9,250
\]
Total cost:
\[
\text{Total Cost} = \text{Number of cases} \times \text{Cost per case} = 9,250 \times 1,100 = \$10,175,000
\]
Annual PMPM rate (assuming full coverage):
\[
\text{PMPM Rate} = \frac{\text{Total Cost}}{\text{Number of months} \times \text{number of enrollees}}
\]
Number of months:
\[
12
\]
Total enrollees:
\[
25,000
\]
Total months:
\[
25,000 \times 12 = 300,000 \text{ member-months}
\]
Therefore:
\[
\text{PMPM Rate} = \frac{10,175,000}{300,000} \approx \$33.92
\]
Answer to Question 1:
The hospital’s capitated PMPM rate should be approximately \$33.92 to cover costs at the current utilization.
Question 2: Calculating the Copay PMPM
Assuming the hospital wants to incorporate patient copays, based on prior data or policy, a typical copay might be set at 20% of the cost per case, or a fixed amount. For simplicity, assume the copay is 10% of the total PMPM rate:
\[
\text{Copay PMPM} = 0.10 \times 33.92 = \$3.39
\]
Answer to Question 2:
The copay PMPM would be approximately \$3.39.
Question 3: Calculating the Net PMPM
Net revenue per member per month is:
\[
\text{Net PMPM} = \text{PMPM rate} - \text{Copay PMPM} = 33.92 - 3.39 = \$30.53
\]
Answer to Question 3:
The net PMPM is approximately \$30.53.
Question 4: Total Revenue from the Contract
Applying the actual utilization rate (370 cases/1,000):
Total cases:
\[
9,250 \text{ (as computed earlier)}
\]
Total revenue:
\[
\text{Revenue} = \text{PMPM Rate} \times \text{enrollees} \times 12
\]
\[
= 33.92 \times 25,000 \times 12 = 10,176,000
\]
This aligns with the total cost, indicating breakeven. If the actual utilization is higher or lower, revenue adjusts accordingly.
Question 5: Profitability Analysis
Total costs for 9,250 cases:
\[
\$10,175,000
\]
Total revenue at $33.92 PMPM:
\[
\$10,176,000
\]
Profit:
\[
\$10,176,000 - \$10,175,000 = \$1,000
\]
The hospital would realize a minimal profit under these assumptions, assuming actual utilization does not exceed the expected levels significantly.
Discussion
Effective contract negotiation in healthcare demands careful calculation of PMPM rates that cover costs, incorporate contingencies, and ensure profitability. Variability in utilization greatly impacts revenue and profit margins. Managing utilization, as the hospital believes it can do better, is essential for maximizing profitability. In the case of the nursing home, understanding maximum days of service before losses inform capacity planning, while for hospitals, balancing copays and capitation rates secures financial stability.
Conclusion
Accurate financial modeling in healthcare contracting hinges on detailed understanding of utilization patterns, cost data, and strategic financial planning. The calculations presented demonstrate how to arrive at sustainable rates and evaluate profitability under different scenarios, which are vital skills for healthcare administrators.
References
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