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Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated and what new ones are created?

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1. For question 1 refer specifically and directly to attached Mclean c 2
2. For question 2 refer specifically and directly to attached Mclean c 3

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1. Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated and what new ones are created?

2. Evaluate the following assertion: "We know they're a good, sound outfit. Look, their auditor signed off on their financial statements."

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1. Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated and what new ones are created?
Managed care contracts change the agents' incentives to control cost because they have their own interests that take precedence over those of the hospital. For example, Dr. Jackson wants PCI to take a huge loan from a big Dallas bank and open an outpatient-imaging center. If PCI makes a profit then it should continue with this center otherwise it should walk away from the project and hand over the assets to the Bank. Dr. Jackson says that there is no additional risk but every loan brings with it a risk. So, the lure of extra profits by the shareholders is changing the incentives of PCI to control costs. In this case the agency cost is the extra interest cost that PCI will incur. In other words, the shareholders are using their position to extra leverage the assets of the company. What is happening is that the agent is turning selfish. A physician orders ...

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Healthcare Management

The short article below concerns the firing of the CFO of a local hospital. What do you think about this story, especially what it infers about the responsibility of the CFO? Also, what is your opinion of the financial issues brought out in the story? Write a brief paragraph or two of 150 words total or less using MS word to check for passive words and complete sentences. Please cite the attached materials relevant concepts for additional guidance.

Hospital CFO Fired for Figures by Thomas J. Baird, Jun 18, 2005

Gila Regional Medical Center fired its chief financial officer this week after an audit showed the hospital will essentially have no net income at the fiscal year's end.

John Rossfeld, Gila Regional's chief executive officer, made the announcement that Cliff Olsson had been terminated during a board of trustees meeting Wednesday. Olsson had been CFO for the past seven years. Olsson would not comment Friday to the Sun-News.

The board also discussed current and future fiscal operations at the meeting, and was told that after bad debts and contractual allowances are taken into consideration, the hospital's bottom line is static.

Sunny McFarren, a spokeswoman for the hospital, said Friday that Rossfeld called in the auditors early because of concerns he had with some projections. "Usually they would not come in until after the June figures," she said. "But John had some concerns about our contractuals and bad debts - whether they were appropriately stated, so we asked them to come, I think it was in early May."

Over the past several years, the hospital had averaged an annual net income of about $3 million, officials reported. "This is a very disappointing finding, because our net income is what we use to fund everything from equipment and new construction, to caregiver raises and new caregiver recruitment," Rossfeld said.

Rossfeld cited numerous factors for the bad fiscal news, but focused on lower collection rates. He said bad debts have increased due to regional layoffs during 2002-03, the fact fewer people have health insurance and those who do often have higher co-payments and deductibles. That, he said, means people are not always opting for services they would have accessed in the past.

Rossfeld added that many people in Grant County who are unable to pay their hospital bills, refuse to sign up for the free care available to them under the Grant County Health Plan. But the bottom line is the hospital is not taking in the revenues it projected.
"We recently called in our auditing firm because we were worried that some of the estimates that had been made here on bad debts and contractual allowances had been much too optimistic," Rossfeld said. "Unluckily, we were correct."

Rossfeld said the hospital had projected it would take in 57 cents on the dollar for services billed during the current fiscal year. "In fact, we now know we are likely to only receive about 51 cents on the dollar," he said. "We will have to do a lot of belt-tightening in this coming year, but we believe our current financial problems are only an unfortunate bump in the road and much less of a financial problem than the medical center faced in 1997."

But Rossfeld said he has no doubt that Gila Regional will be a stronger organization than ever in a year from now. Rossfeld noted that calculating a hospital's contractual allowances - that is, the difference between what a hospital charges and what entities like Medicare actually pay for those services - and calculating the amount of bad debt the hospital will incur, are not exact sciences in the health-care industry. "That is because we incur the cost of care as it is given, but we are not paid for 50 to 70 days," he explained. "With Medicare, Medicaid and HMOs, you are to some extent guessing about what you will actually be paid. And with bad debts, you are guessing about not only what percentage you will be paid, but also whether you will even be paid at all."

But, that's the reason hospitals have audits - to reconcile those possible fluctuations in receivables, he added.

Thank you.

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