Accounting/Finance

6. What is the premium for the low-cost plan?
(Note: This plan will have the highest copays and lowest service thresholds.)

7. Which plan should the managed care company offer to the buyer consortium?

1. Historical data indicate that the covered population uses 500 inpatient days of acute careservices per 1,000 members. Furthermore, the consortium’s current average daily payment forinpatient services is $1,400. However, the managed care company’s data indicate thatutilization management could reduce utilization into the 400-450 day range and that hospitalswithin the state currently have managed care plan contracts with per diem rates of $1,000 to$1,200. With this information in hand, calculate the appropriate base PMPM for inpatientservices.

When developing premiums, the base PMPMs must reflect the best expectations of the plan, as
opposed to blindly accepting historical data. Of course, such expectations are based on historical
utilization and cost data, but if actions taken by the plan, such as tightened utilizationmanagement or more aggressive provider contracting, mean that the historical data are invalid,
then these changes must be incorporated into the rate setting process.

Here, we assume that the HMO has a good chance of attaining the utilization andcontract rates that it has experienced, so the base inpatient acute care PMPM is based oninpatient utilization of 425 days per 1,000 members and a $1,100 per diem rate. Thus, the annualutilization per member is 425 / 1,000 = 0.425 days per year, producing an annual cost permember of 0.425 x$1,100 = $467.50. Thus, the monthly PMPM is $467.50 / 12 = $38.96. Notethat the model automatically calculates this amount when the $1,100 per diem rate and 0.425days per member annual utilization are entered into the appropriate cells.

2. What are the appropriate base PMPM costs for the remaining facilities services, includingskilled nursing home, mental health, surgical, and emergency room utilization?

The fee-for-service approach that was used in Question 1 is also applied here.

For skilled nursing care, utilization is 0.0252 days per member per year, and the currentaverage daily cost is $650, for an annual per member rate of 0.0252 x$650 = $16.38. Thus, themonthly PMPM is $16.38 / 12 = $1.37. Note that the model automatically calculates this amountwhen the $650 daily cost and 0.0252 days per member annual utilization are entered into theappropriate cells.

For inpatient mental health care, utilization is 0.0644 days per member per year, and the current average daily cost is $740, for a PMPM of (0.0644 x$740) / 12 = $3.97. Note that themodel automatically calculates this amount.

For hospital-based surgery, utilization is 0.0417 surgeries per member per year, and thecurrent average cost is $1,800 per case, for a PMPM of (0.0417 x$1,800) / 12 = $6.26. Note thatthe model automatically calculates this amount.

For emergency room care, utilization is 0.132 visits per member per year, and the currentaverage cost is $250 per visit, for a PMPM of (0.132 x$250) / 12 = $2.75. Note that the modelautomatically calculates this amount.

Facilities services not listed in the preceding paragraphs were calculated in a similarmanner. (See the model for details.)

3. Now, focus your attention on physician services. What are the base PMPM costs for physician
services, including primary care services and specialist office visits?

The budgetary approach is used for primary care physicians. Because each primary care physician
is assumed to handle 4,000 patient visits, and utilization is expected to be 3.4 visits per member,
each physician can be assigned 4,000 / 3.4 = 1,176.47 members. Assuming annual reimbursement
of $200,000, the PMPM cost is $200,000 / 1,176.47 / 12 = $14.17.

Specialist’s office visit costs are estimated using the fee-for-service approach. Here, eachmember has 1.5 visits per year at a cost of $92.65 per visit, for a PMPM of (1.5 x$92.65) / 12 =$11.58. Both these amounts are calculated in the model.

4. Use the data developed in Questions 1 through 3, along with other required inputs, to complete
the Exhibit 5.1 Premium Development Worksheet assuming that a moderate approach is taken
regarding the delivery of health services. Consider this premium to be the base case.

The base (moderate cost) case solution is presented on the next page. In general, moderate (midrange)
limitations are place on mental health care services and moderate copays are assessed.The final result is a PMPM of $129.48, which further breaks down into a monthly premium of
$157.45 for single subscribers and a family premium of $434.54.

Note that the solution shown here assumes a 5 percent inflation rate in both medical andother costs associated with the contract. This allows for cost increases that are expected to occurbetween the data collection used to develop the bid and the actual implementation of the contract.

Also, note that the amount that needs to be collected (based on 75,000 total members) is
75,000 x$129.48 = $9,711,000. Furthermore, the premiums collected are expected to be (12,000 x
$157.45) + (18,000 x$434.54) = $1,889,400 + $7,821,720 = $9,711,120, so the premium amounts
generate the requisite revenues (with a small rounding difference).

Finally, note that students will have different solutions depending on how they define themoderate scenario. However, most students will develop a PMPM within a few dollars of the onepresented here. Here are the limitations and copays used in the base case solution:

Mental health coverage is limited to 60 days.
Copays are as follows:
Acute inpatient care 0 per admission
Mental health inpatient care $150 per admission
Inpatient surgical services $100 per procedure
Emergency care $ 25 per visit
Primary physician care $ 15 per visit
Specialist physician care $ 10 per visit plus $10 PCP copay

**See attached Excel file with the model completed for this base case.**

5. Now complete the worksheet for the high-cost plan. (Note: This plan will have the lowestcopays and highest service thresholds.)

Here are the limitations and copays use is this solution:
Mental health coverage is limited to 90 days.
There are no copays with this plan.

6. What is the premium for the low-cost plan? (Note: This plan will have the highest copays andlowest service thresholds.)

Again, there is some room for differences among analyses.

7. Which plan should the managed care company offer to the buyer consortium?

Here is a review of the results:

PMPM Single Premium Family Premium

Low-cost plan $118.32 $143.88 $397.08
Moderate-cost plan $129.48 $157.45 $434.54
High-cost plan $142.49 $173.27 $478.19

Although these differences may or may not appear substantial to you, don’t forget that these are
monthly premiums based on 75,000 employees (covered lives). Here are the total annual
premiums:

Total Annual Premium

Low-cost plan $106,488,000
Moderate-cost plan $116,532,000
High-cost plan $128,241,000

Here, we see that the plans differ in total premiums by over $10 million dollars between the least
costly to the most costly. 6. What is the premium for the low-cost plan?
(Note: This plan will have the highest copays and lowest service thresholds.)

7. Which plan should the managed care company offer to the buyer consortium?

THESE ARE THE QUESTIONS TO BE ANSWERED, THE 2 TWO BELOW #6 AND 7

6. What is the premium for the low-cost plan?
(Note: This plan will have the highest copay and lowest service thresholds.)

7. Which plan should the managed care company offer to the buyer consortium?

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