Case #1 – A Market on the Move

You’ve read everything you can about the legislative environment (both regionally and nationally) and spoken to several brokers who together advise most of the local employers in the region. You believe the most important changes that are about to hit this region are the following:

1. As Medicare reduces DSH and other payments, reimbursement from Medicare will drop from 30% of charges to 28% next year
2. The health exchanges established in the ACA have not been much of a factor in the region so far, but that’s about to change. The two largest payers in your state both plan to really step up in the exchanges and market these plans aggressively both to currently un-insured and those with current, but unattractive employer-based coverage. They believe that by 2021, they’ll have 25% of all commercially insured patients in exchange-based products.
3. There has been a change in both governor and the makeup of the state legislature, which means your state will engage in Medicaid expansion next year. Thus, more people will have coverage, and the uninsured population will diminish, but not go away entirely. Your best estimate is that uninsured visits community-wide will reduce from 70,500 to 6,300. You estimate that, of the patients who have new coverage, half will be Medicaid recipients and half will enter the commercial plans.

The assignment – as you consider how to guide the CEO, answering the following questions should help:

Part A

1. Using the information provided, estimate total gross and net patient service revenue per hospital currently (2020). What is each hospital’s operating margin in terms of dollars and percentage? Based on this, who is doing well, and who is not? Who has the most to gain and lose as the current environment changes?
2. Based on what you know will happen with the next year, re-calculate the estimates from question #1 for 2021. In your estimate, assume that commercial, Medicaid and uninsured patients still pay the same % of charges. As you consider the population that moves into commercial insurance and Medicaid, you can assume that each hospital continues to take the same share of each payer category (in other words, if hospital A had 20% of the commercial visits in 2020, they will have 20% in 2021). You can also assume that total community visits and charge and cost per visit numbers will remain as they were in 2020.
3. Based on everything you’ve read, the payers putting products into the health exchanges want to market these as true, lower cost options. To get there, they will not reimburse as much as other commercial products. In fact, your best estimate is that they will pay 120% of the Medicare reimbursement rate. If that is the case, how does your estimate of 2021 performance change? Is this good or bad? You may want to answer that question from the perspective of the region as a whole and then for each hospital. Assuming it was optional, would you recommend that St. Sebastian participate in the exchange-based products?

Part B

4. In this city, there are two major payers who together cover 85% of the commercial insured lives. They have both approached St. Sebastian about forming narrow networks as a vehicle for selling products in the exchanges. Your hospital has an excellent reputation, and both payers would like to sell a product that features your hospital as the only in-network option for adult care. So, in exchange for agreeing to a reimbursement rate of 120% of Medicare, St. Sebastian would garner 75% of the hospital visits in the exchanges. For the rest, assume Pediatric continues to serve the same number of patients (i.e. same as you’ve projected for 2021 previously) and the remaining visits are evenly split between Mercy and University. Is this an offer that St. Sebastian should accept?
5. You strongly suspect that both payers also made this offer to your competitor, Mercy. Based only on what you know about the financials, are they likely to accept this deal? If the payers are going to choose only one partner, do you advise your CEO to aggressively pursue a ‘first to sign’ strategy, or hang back and allow Mercy to act first?
6. Thus far, we’ve assumed that all costs are variable (i.e. $2,050 per visit for Pediatric), but is that necessarily true? Suppose for a moment that each hospital’s cost structure is essentially fixed? How does that change your answers to #2, 3, 4 and 5 above?