Price Setting Example - Healthcare Finance

For the following price setting example, the initial assumptions are provided in the table below.

Total cost $200,000

Total volume 2,000

Average cost $200

Payer volumes

Medicare (payment rate = $190) 800

Medicaid (payment rate = $150) 200

Managed Care # 1 (payment rate = $220) 600

Managed Care # 2 (pay 80% of charges) 200

Uninsured (pay 10% of charges) 200

Total all payers 2,000

Desired net income $10,000

Medicare and Medicaid presently account for 50% of the volume. The hospital wishes to reduce its dependence on government payers. Assume that Medicare volume is reduced to 760 patients and Medicaid volume is reduced to 190 patients. The volume from managed-care plan #1 rises to 640 patients from 600. The volume from managed-care plan #2 increases to 220 patients. Thus, total volume is unchanged at 2,000 visits. What is the new price necessary assuming all other factors are unchanged?

See book Essentials of Healthcare Finance book page141-143 Chapter 6

Price or Rate = Average cost + Required Net Income + Loss on fee schedule payers aka fixed price payers

Volume of charge payers

1 - Average discount on charge payers

Average cost = $200

Required or desired net income = $10,000

Loss on fee schedule payers aka fixed price payers

=(average cost – average cost to each specific fee schedule payer) x volume of each specific fee schedule payer

Then take gains from chargeless payers and subtract from fee schedule payers

• Loss from Medicare

=($200-$190) x 800

=$8000

• Loss from Medicaid

=($200-$150) x 200

=$10000

• Gain from chargeless payer aka full payment payer

=($220-$200) x 600

=$12000

Therefore $12000 - ($8000+$10000)= $6000 loss on fee schedule payers since the full payment payers still could not make up the difference.

Volume