Unit 2 Discussion - Domko
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Rates Negotiation Crisis
Keri M. Domko
Park University
HA516DL: Healthcare Finance
Dr. Jason Carreno
March 25, 2023
Module 2: Rates Negotiation Crisis
HA516
AAAAA518
Desired Net Income
1
Problem Statement
The hospital’s largest insurance payer, North Creek HealthCare accounts for nearly 30%
of all patient-care revenue and this percentage is growing. North Creek is refusing to increase
inpatient payment rates to be more in line with Medicare. North Creek initially proposes a
payment increase of 5%, however, this will not meet the hospitals desired net income. In fact,
according to Ms. Cheryl Noki, former CFO for the hospital, North Creek would need to raise
their current rate by 22% to match Medicare. (Toolwire n.d.)
Recommendations
It is recommended that the hospital prepare for rate negotiations based on desired net
income. Net income is the difference between revenues and expenses. The hospital needs to
generate enough revenue through sales and services to sustain operations and provide for
replacement of physical assets as well as a return to investors. Deficiencies in levels of net
income can be tolerated for short time frames, but long-term continuation of inadequate pricing
will eventually result in business failure. (Cleverley et al., 2018)
PAYER
NORTH CREEK
MEDICARE
AVG COST PER PATIENT
$
5,859.00
$ 6,200.00
CURRENT PMT
$
4,800.00
NORTH CREEK COST
$
5,859.00
$ 5,859.00
$
6,200.00
$ 4,800.00
-95%
122%
ANALYSIS:
NORTH CREEK PATIENTS COST 95% OF WHAT MEDICARE PATIENTS COST. WITH A
PAYMENT OF $4800, NORTH CREEK WOULD NEED A 22% INCREASE TO COVER COSTS
To maintain operations, the hospital will need to calculate costs that will provide an
appropriate return on investment (ROI). The hospital will need to cover the payments to
investors and maintain the ability to cover any cost of equipment, whether through depreciation
or through replacement. “Healthcare firms have sizeable working capital needs that are not
recogni8zed as expenses but require cash outlays. For example, most healthcare firms pay
employees on a biweekly basis but collect patient receivables on a 60-plus-day basis. Healthcare
firms must set prices to generate a reasonable level of profit that will permit them to replace their
capital-asset bases in a timely manner and to provide for working capital needs.” (Cleverley et
al., 2018)
In addition to ensuring the hospital maintains a reasonable ROI, it is also necessary to
“assess the reasonableness of prices based on comparisons with similar hospitals and/or other
hospitals in the same geographic region”. (Cleverley et al., 2018)
This is known as Comparison-
of-Charges method. The hospital cannot reasonably expect North Creek to pay a higher price
than it would at a similar hospital, nor can the North Creek reasonably expect the hospital to
accept less than it would from another payer or what a similar hospital would accept.
Summary
To prepare for negotiations with North Creek, the hospital needs to take the calculations
in to account for the hospitals desired net income based on both the ROI and comparison to
similar hospitals in the region. The hospital uses bundled services arrangement, where “payment
is fixed based on a negotiated fee schedule (e.g., $1,000 per day to cover all services provided)
and is the same regardless of the level of ancillary services provided. Higher degrees of bundling
include payment for certain episodes of care or for a covered life in a capitated arrangement.”
(Cleverley, 2022)
Since North Creek pays less than Medicare pays, yet the cost is nearly the same (95%)
and the hospital has 40% of the market share where the competitor has 60% of the market share,
the payments should be nearly equal. To make all things equitable, North Creek would have to
increase their payment by 22%.
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References
Cleverley, W. O. (2022, December 19).
A closer look at healthcare payment methods
. HFMA.
Retrieved March 25, 2023, from https://www.hfma.org/payment-reimbursement-and-managed-
care/contracting/a-closer-look-at-healthcare-payment-methods/
Cleverley, W. O., & Cleverley, J. O. (2018). Price setting for healthcare services. In
Essentials of
health care finance
(pp. 151–170). essay, Jones & Bartlett Learning.
Toolwire. (Producer). (n.d.). Navigate 2 Scenario:
Episode 2:
Rates
Negotiation Crisis
. LearnScapes for health care finance. [Video
file].
https://canvas.park.edu/courses/74051/modules/items/5307604