Bay Pines Medical Center’s Financial Statements

Posted: July 13th, 2021

Bay Pines Medical Center’s Financial Statements

Introduction

Many organizations most especially in the health industry use the PMPM analyzer to calculate or determine the average cost of medical care for each member under any insurance cover. PMPM is essential among other companies especially those with the health benefits as part of their compensation and benefits package. PMPM involves the cost per member per month, which is imperative to such companies. Member month is a common term used during the calculation and data analysis. It refers to the number of individuals or members that are participating in a certain insurance policy monthly (Lieberhal, 2013). This is because using the PMPM tool allows these companies to estimate and determine how much each customer or patient ought to be charged for the insurance coverage effectively and accurately. Below is a case study of Bay Pines Medical Center, in which the PMPM rate will be calculated on various occasions to determine individual costs as well as other scenarios indicated.

Advantages and Disadvantages of Using the PMPM Approach

The benefits of integrating and adopting the PMPM analytical tool in the health center are numerous. Primarily, it enables the rapid integration and determination of Medicare cost coverage of new members. Secondly, the tools the identification and rectification of issues such as liabilities and viability, thus, increasing the financial health of the center. Finally, it enables easy and timely rate setting on the utilization basis as well as the base costs (McConnell, 2016). On the other hand, despite being beneficial in determining the costs per member, the tool is ineffective when assessing the value acquired from the costs and payments. This is because; determining the cost per member per month does not merge the financial metrics and costs that can be used to assess the value of the center. Health Insurance and other companies implement the PMPM to not only determine the average cost a member should pay monthly but also assess the market trends, plan, and set the premiums to be used by existing and new members annually or monthly.

Some of the assumptions made when calculating the PMPM, in this case, include microeconomic factors, medical histories of the members, ever-changing trends, and many others. In most cases, it would be difficult for medical centers to include inpatients with higher risks (tier 4) as they pose a higher risk when they stop the insurance cover or they pass on. However, this group also becomes a source of higher investment as they acquire this insurance covers more often (McConnell, 2016).

Data Analysis and Interpretation

The purpose of PMPM in Bay Pines Medical Center is to determine the average cost members should pay monthly to cover their insurance costs. When calculating the PMPM Rate to be set to cover the medical costs plus administrative expenses in the health center, various elements are essential. They include determining the annual usage or cost per member, the average costs each individual daily, the administration expenses, and finally the total rate. The PMPM rate is calculated by multiplying the total rate with the annual usage per individual and later dividing by 12 months (C*X/12). In that case, to attain the total rate, one has to calculate the average costs per individual as well as the expense rates present in the center.

When determining the annual usage or cost per member, it is calculated by dividing the individuals in each service category by the average number stated to represent the rates. In this case, it is per 1,000 (x/1000). The medical center estimates and gives the average costs of each member daily acquired from their financial statements. On the other hand, administration costs, in this case, will be calculated by subtracting the average daily costs from the annual usage and later on dividing the total cost with 90%. The 90% in this case, is derived from the 10% of the total premium that the health center allocates towards covering the administration costs (Y-X)/90%. The total rate is derived from adding the average cost per day with the administration expenses (Y+Z).

Assume that: Annual usage per member = X

The average cost per day = Y

Administration expense rate = Z

Total rate = C

PMPM Rate to be set to cover the Medical Costs plus Administrative Expenses

For the company to cover the medical costs and administrative expenses adequately, they have to ensure that each covered member has to pay a cost of $53.82 cost per month. When each of the covered members pays a total cost of $53.82 monthly, in a year, each member pays a total of $645.84. Which when multiplied by the total number of members, should be adequate to cover all their medical costs as well as the administrative expenses. For instance, if a patient wished to purchase an insurance policy in the service category of surgical, they should pay a PMPM of $20.83. The $53.82 is the collective PMPM that the company expects to attain if the estimated target population purchases all these services. If you wished to purchase a maternity insurance policy in Bay Pines Medical Center, they would charge you $5.84 per month as per this chart determined by the PMPM analyzer tool.

PMPM Rate if Reduction is by 10%

In case the utilization of each service category reduces by 10%, it is likely that the cost per member per month will reduce equally. This is because, if the base utilization and total cost reduces for each service, the amount one has to pay equally drops. The elements that enable the calculation of the PMPM rate remain the same except for the annual usage cost of each member, which reduces by 10% for each service category. Moreover, the rest of the figures namely the average cost per day, administration expenses, and the total rate remain the same. Some of the reasons why the annual usage per member may reduce may be the reduction of members covered by the medical center. Some long-term members may decide to denounce the center’s medical coverage while some may die especially those with terminal illnesses. When this happens, the total population reduces. Therefore, the “if” reduction of total members by “10%”; there is a likelihood of a reduction in the PMPM rate to be set.

From the calculations below, it is clear that the PMPM rate reduces from $53.82 to $ 48.42. Even without making all these calculations, when one reduces the initial PMPM of $58.82 by 10%, it will result in $48.42. This shows that when any element reduces the PMPM rate reduces as well. Besides, if it were an increment of 10% instead, the initial PMPM rate would also increase.

PMPM Rate if Reduction is by 20%

In case the utilization of each service category reduces by 20%, it is likely that the cost per member per month will reduce equally. This is because, if the base utilization and total cost reduces for each service, the amount one has to pay equally drops. The elements that enable the calculation of the PMPM rate remain the same except for the annual usage cost of each member, which reduces by 20% for each service category. Moreover, the rest of the figures namely the average cost per day, administration expenses, and the total rate remain the same. To understand, this below is an illustration. The explanation in this case scenario is similar to that above; the only difference is that the reduction increases to 20%.

From the calculations below, it is clear that the PMPM rate reduces from $53.82 to $ 43.05. Even without making all these calculations, when one reduces the initial PMPM of $53.82 by 20%, it will result in $43.05.

PMPM Rate if Average Cost’s Reduction is by 10%

In this case, the main difference from the initial PMPM is that the average cost per day (Y) reduces by 10%. Once the average cost per day of each individual reduces by 10% in each service category, it alters with the other elements. As it is instrumental when calculating the total rate as well as the PMPM rate. From the analysis below, it is clear that the cost per member per month that should be set when the average costs reduce by 10% is $48.42. Interestingly, the figure is similar to that when the base utilization reduces by 10%. In conclusion, when the annual usage per individual and the average cost of the same individual reduces by a similar percentage, as 10% in this case, the PMPM rate is similar.

When there is reduced spending among the inpatient members in the maintenance of their healthcare, the overall total cost and PMPM rate reduces as well. For instance, in this case, when the average spending reduces by 10%, the PMPM reduces by 10% as well when estimating from the initial PMPM rate.

Premium after Utilization (10%) and Cost Reductions

The utilization of the cost per member per month enables hospitals and other companies to determine, plan and set the most appropriate premium charges. A premium charge is the fixed amount of charge that one pays when purchasing an insurance policy. However, this figure may change due to fluctuations in the market and other economic trends (Lieberhal, 2013). When both the base utilization and average costs reduce by 10%, the administration expenses rates change. This also ensures that the total rate remains the same; however, the PMPM rate reduces.

Premium after Utilization (20%) and Cost Reductions

Assuming that the utilization reduces by 20% while cost reductions reduce by 10%, the PMPM would be $38.74. This would be the worst-case scenario as it portrays a reduction of 30%, which could reduce the value of the medical center. The sales and revenues are set to decrease in this case, and it may be detrimental as service providence could be of low quality. When evaluating the initial PMPM rate, the reduction would amount to approximately 28%, which can be detrimental to their cash flows and general growth.

 Data Interpretation

From the above data analysis, PMPM identifies, determines, and sets the premium charges that ought to be paid by each member monthly. However, from the above financial figures, Bay Pine Medical Center has to determine the most appropriate premiums to set. This is because, every business’s primary goal is to maximize profits, increase value, and serve its customers to the ultimate satisfaction. With the most appropriate premiums, the medical center will maximize its competitive advantage, increase customer satisfaction, and at the same time increase value. Therefore, the medical center can decide to use the initial scenario as its base, fixed, and capitated charges. Setting the premium charges at a total cost of $53.82 would depend on their performance in the industry, industrial competition, and customer satisfaction.

If the medical center decides to penetrate the market with lower prices and at the same time maintaining a high market share, the medical center can opt to take up the combined scenario, where they reduce the utilization and average costs by 10%. This is because; they achieve three main goals and objectives primarily, comparative advantage. Secondly, there will be an increasingly competitive advantage due to the pricing strategy (Lieberhal, 2013). Thirdly, there will be maximized value, as the premium is collective and only reduces by 19%, which is fair.

Pricing is an essential objective that the medical center should analyze at length to determine the most appropriate prices to set. This analysis will effectively allow Bay Pines medical center to determine, plan, and adopt the most effective pricing strategy. This will enable them to achieve other corporate and business goals and objectives such as maximized competitive advantage, increased comparative advantage, increased customer satisfaction, and maximized value of their center. Determining the net value and growth of the medical center requires a pricing strategy that aligns with the corporate and business goals and objectives.

Conclusion

When determining the pricing as well as the most appropriate pricing strategy to adopt and implement in the workplace, one must consider issues such as growth, increased value, and customer satisfaction. In most cases, the pricing determines the comparative and competitive advantages of the company in the industry. It is, in that case, using the PMPM tool can be beneficial in determining the pricing of services in a specified time or period for each member. For instance, Bay Pines Medical Center offers insurance cover to its members, to determine the most appropriate prices to charge each service and each member, PMPM seems beneficial. It enables the medical center to learn on the best-case scenarios, as well as the worst-case scenarios in case they decide to reduce the costs of various services. PMPM enables the determination of the prices of the service, which would enable the center to determine their competitive and comparative advantage. However, one main goal lacking is to determine the value the medical center is likely to achieve through the identified pricing strategy.

References

Lieberhal, R. (2013). Analyzing the health care cost curve: A case study. College of population health faculty papers, Vol 16(5), pp:341-348.

McConnell, K. (2016). Oregon’s Medicaid Coordinated Care Organizations. JAMA, Vol 315(9), pp:869-870.