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Financial Decision Management (Health Care)

A physician, Dr. Thought, is considering the possibility of joining a new Individual Practice Association (IPA) in order to increase her volume of care and her income.
Currently, the physician has the following practice statistics:

Patient population 3,500
Annual visits 5,750
Average revenue per visit $97.50
Office and equipment costs (annual, fixed) $75,000
Staff costs (annual salaries, fixed) $85,000
Malpractice costs (annual, fixed) $70,000
Variable costs per visit (drugs, supplies, etc.) $23.75

Dr. Thought believes that 18% of her current patients would join the IPA if she signs on. And, half of these (i.e. 9%) would join even if Dr. Thought does not sign on and thus would leave her practice if she does not join the IPA. Dr. Thought, however, realizes these estimates (the 18% and 9%) are guesses and that perhaps 30% would sign on or 15% or 7%.

Dr. Thought also guesses that, besides the "switchovers" from her current practice, she may get 700 new patients through the IPA. Again, this is an uncertain guess. The cost structure of her practice would remain as it is now if new patients are added. With current staffing, who are salaried, she could deliver 7,000 visits per year. However, for visits beyond 7,000 per year, she will have to pay $21.00 per hour overtime pay for staff support (each visit average 30 minutes). This would be in addition to the normal $23.75 variable cost per visit in her practice.

The IPA is offering two different payment mechanisms for her to choose from. The first is a discounted fee-for-service arrangement. Under this arrangement, they are willing to pay a flat rate of $47 per visit. The second payment mechanism is a capitated arrangement. Under this payment system, Dr. Thought would receive $112 per year per new patient who signs up. This payment would cover all primary care services provided by Dr. Thought. Dr. Thought believes that the new patients will average 2 visits per year.

You are hired by Dr. Thought to analyze this decision for her. Please prepare a 3-5 page memo (double spaced) that clearly considers this financial decision. Make your memo integrated, clear and logical, but be sure to consider the following specific questions raised by Dr. Thought:

1. Given all of my assumptions, how much is my income under the two payment options?
2. Given that I expect the 700 new IPA patients and the 18% switchovers, how high would the IPA patient utilization have to be before I start to make more money with payment option 1 rather than option 2?
3. "Given all my assumptions, and the fact that I spend 30 minutes on average to see a patient, how much will I be making (or losing) per added hour of work if I join the IPA?" (Calculate for both payment options.)
4. "Assuming that my assumptions are correct, and I join the IPA under option 2, what do I have to charge my fee-for-service patients if I want to earn $265,000 per year?"
5. "How sensitive are your estimates of net income to changes in my assumptions?" (Perhaps you should do a sensitivity analysis to determine how the financial findings vary depending on the value of each of the key assumptions.)
6. "What do you think I should do?"

*The file can also be viewed in the attached .htm and .doc files

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I have done most of the work in worksheet. Build the writeup based on excel sheet. I am ...

Solution Summary

This posting discusses financial decision making in health care context. It shows income under different payment options.

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