Profit Analysis in a Capitated Environment
Posted on March 25, 2009 - Filed Under Finance
As a review of profit analysis, consider how the analysis is changed when provider operates in a capitated environment. In addition to solidifying concepts presented in previous sections, this section provides insights into the basic differences between fee-for-service reimbursement and capitation.
To begin, assume that the purchaser of services from Atlanta Clinic is the Alliance, a local business coalition. As in previous illustrations, assume the Alliance is paying the clinic $7,500,000 to provide services for an expected 75,000 visits, but now the amount is capitated. Although projected total
revenues remain the same as the previous base case (see Table 5.4), they are qualitatively quite different. The $7,500,000 that the Alliance is paying is not explicitly related to the amount of services provided by the clinic but to the size of the covered employee group. In essence, Atlanta Clinic is no longer merely selling healthcare services as it had in the fee-for-service or discounted fee-forservice environment. Now, the clinic is taking on the insurance function in that it is responsible for the health status (utilization) of the covered population and must bear the attendant risks. If the total costs of services delivered by the clinic exceed the premium revenue (paid monthly on a per member basis), the clinic will suffer the financial consequences. However, if the clinic can efficiently manage the healthcare of the served population, it will be the economic beneficiary.
How might Atlanta’s managers evaluate whether or not the $7,500,000 revenue attached to the contract is adequate? To do the analysis, they need two critical pieces of information: cost information and actuarial (utilization) information. The clinic already has the cost accounting information—the full cost per visit is expected to be $94.41 (at a volume of 75,000 visits), with an underlying cost structure of $28.18 per visit in variable costs and $4,967,462 in fixed costs. For its actuarial information, Atlanta’s managers estimate that the Alliance will have a covered population of 18,750 members with an expected utilization rate of four visits per member per year. Thus, the total number of visits expected is 18,750 × 4 = 75,000. Although this appears to be the same 75,000 visits as in the fee-for-service environment, significant difference exists in the implications of this volume. Because there is no direct linkage between total revenues and volume, utilization above that expected will bring increased costs with no corresponding increase in revenue
The revenues expected from this contract, $7,500,000, exceed the expected costs of serving this population, which are 75,000 visits multiplied by $94.41 per visit, or $7,080,750. Thus, this contract is expected to generate a profit of $419,250, which, not surprisingly, is the same as the original base case fee-for-service result (except for a rounding difference). (See Table 5.4.)
Taken From : HEALTHCARE FINANCE
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