Ch. 7 Pricing and Service Decisions

Question 1

Price Setting Strategies

Full Cost Pricing:

• Recover all costs associated with operating a business
  
  • Direct variable costs of providing the service
  • Direct fixed costs
  • The appropriate share of the overhead expenses of the organization
  • A profit component

Question 2

Marginal Cost: Cost of proving one additional unit of output (product or service)

If fixed (direct and overhead) have been covered, find the marginal costs that must be covered for the variable component of the marginal product of service

Question 3

Projected Payer worksheey & P&L Statement

Contribution Margine:

Expected Total Revenue - Expected Total Variable Costs

Setting a Price for a new plan: Ex: Capitated plan for inpatient service

Step One:

• What portion of current patient population are expected to convert?
• Make assumptions regarding the utilization and variable costs

Question 4

Fee For Service: Inpatient Capitation rate

• Expected Utilazation

Ex: Target 400 in-area patient days for each 1,000 members or .4000 inpatient days per member.

Fee for service charge = $1,200 per inpatient day

Inpatient cost PMPM =

Per member utilization rate x Fee-for-service rate / 12

= .400 x $1,200 / 12 = $40.00 PMPM

Question 5

Cost approach: Used to estimate physicians’ costs for the covered population

• Based on utilization and underlying costs
• Number of Full Time Equivalent (FTE) physicians required to treat the covered population
  
  • Depends on physician productivity
• Estimate cost for physician servics = Number of physicians required x
  
  • avg. cost per physician
    
    • base
    • fringe
    • malpractice
  • Add Clinical and Admin support

Question 6

Assumptions in setting Physician Rates:

1. How many visits on average will each enrolee make per year? Ex: 3
2. How many patient visits can each physician handle per year? Ex: 4,000
3. What is the total compensation per physician per year? Ex: $175,000

Calculate Primary physician’s cost:

Each enrollee will require 3/4,000 = .00075 physicians

Annual cost = .00075 X 175,000 = 131.25 per enrollee.

So, PMPM cost = 131.25 / 12 = $10.94

Question 7

Work in FTEs (Full-time equivalents costs for clinical and administrative support

On avg. physician’s require 5.7 FTEs and each FTE receives $45,000 on average in total compensation per year.

Per enrollee:

.00075 Physicians

_+ .00060 Specialists _

= .00135

FTEs = .00135 x 5.7 x 45,000 = 346.28

PMPM = 346.28 / 12 = 28.86

Question 8

Work in expenditures on supplies

Avg. supplies per visit = $10.00 x 4.2 visits = $42.00

PMPM = 42/12 = $3.50

Add facilities expense = $6 PMPM

Add profit markup of 10% of subtotal after facilities exp.

Finally add allowance for outside referrals = $5.40

So Total PMPM calculation:

Answer 8

Primary Care $10.94

Specialist Care 14.20

Support Staff 28.86

Supplies 3.50

Facilities _ 6.00_

Subtotal $63.50

Profit (10%) _ 6.35_

In-area total $69.85

Outside referrals _ 5.40_

Total _ $75.25_

Question 9

Demographic Approach: Focuses on the characteristics of the population being served, which is then coupled with cost or fee-for-service data to estimate the capitation rate

Question 10

Relative Value Unit (RVU)

Measures the amount of resources consumed to provide a particular service

• Application of activity based costing
• Ex: One RVU = 5 minutes of technicians’ time; $10 worth of laboratory equipment; $5 worth of lab supplies

Step one:

Figure out the number of RVUs required to provide a particular service Ex: 50 RVUs to conduct a Blood cell count.

Cost per RVU:

Annual cost to run the lab (including overhead) / total RVUs per year.

Question 11

Ex: $250,000 / 165,000 (RVUs) = $1.52 per RVU

Add. Profit Margine of 20%

Cost / (1 - margine %) = 1.52 / (1 - .20)

= 1.52 / .80 = 1.90

(1.90 - 1.52 / 1.52) = 25% mark up in price of each RVU.