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

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