Following the American Psychological Association’s Guidelines
Health Maintenance Organizations, or HMOs, are realizing for many people the benefit of affordable healthcare. HMOs are a form of managed health care plan that allows its members to avail of health services through a network of healthcare service providers (doctors, hospitals and clinics) affiliated with the HMO. Typically, an availing member pays a membership premium for which a copayment is determined. A copayment is the amount a member pays for healthcare. HMOs pay the difference between a member’s copayment and the cost of the availed health service. HMO services are generally available to members within a particular geographic area or service area. For example, an HMO extends health benefits to a particular member who is charged by the accredited healthcare service provider. Let us say this patient is billed by the HMO doctor $80. The HMO assigns a copayment of $20, the amount that the member actually pays the physician. The doctor bills the HMO the remaining $60 for healthcare services extended to its member. This is the benefit of HMO membership, effectively lowering the cost of healthcare for the covered member in return for the regular premium this member pays for HMO services. A look at the rising costs of healthcare, mainly managed health, care is in order. In 2001, the average cost (annual premium) for an HMO plan was pegged at around $3,900. This has gone up to about $10,300 in 2011. The increase in the cost of HMO services is attributed to there being more options and wider coverage now than in the past for members. HMOs have had to contend with rising medical care costs and one way to deal with this was to increase its price in the form of the premium that members pay the HMO. HMOs are known to have lower hospitalization rates, shorter hospital stays and use fewer costly tests and procedures than the traditional system delivery. From the illustration above, it is easy to appreciate how HMOs make marginal gains or profit from its managed healthcare plans. HMOs get high premium payments from its clients whose utilization of already-paid health services is essentially contingent on need. HMO service delivery is more efficient because HMOs have lower costs and can presumably bargain with its service providers who can bank on the wider HMO client base. Lower utilization rates of HMOs are ascribed to the tendency to enroll consumers who are healthier than average, especially in group plans. These allow the costs of healthcare to shift from HMO to traditional insurers. HMOs keep healthcare costs lower by providing doctors with incentives to keep their patients healthy and avoid costly hospital treatments.
We now consider the problem presented in this exercise. An HMO proposes to contract a provider for $2,000 for a certain medical procedure. The provider’s standard rate is $2,400. How can the provider secure a profitable contract from the HMO?
We do the math and say that the HMO proposal at face value is not profitable for the service provider, losing out $400 for every referred case of the HMO. There are several things that can be explored by both parties in order to secure a fair contract and bring in hospital business. But my main recommendation to secure a contract with the HMO, without making the contract a disadvantage to the hospital, is to propose a higher copayment scheme for that particular procedure. Patients will have to fork in the difference between actual hospital procedure (DRG 373) cost and the amount that the HMO agrees to pay the hospital. The referral cases from the HMO are a major reason to secure a fair contract and while the copayment arrangement may be close to break-even, the higher numbers promise to generate added revenues only plus a highly possible market for ancillary and related medical in-patient services.
References
Baker, Laurence C.; Corts, Kenneth S. 1996. HMO penetration and the cost of health care: Market discipline or market segmentation? American Economic Review, May96, Vol. 86 Issue 2. Retrieved from http://polaris.umuc.edu/~rouellet/tman613sp99/suppread/Paper27.htm.
Frontline. n.d. The Outlook for HMOs. Retrieved from http://www.pbs.org/wgbh/pages/frontline/shows/hmo/etc/outlook.html.
Texas Department of Insurance. 2012. Health Maintenance Organizations. Retrieved from http://www.tdi.texas.gov/pubs/consumer/cb069.html.
The New York Times. 29 November 2010. Steep Rise in HMO Costs. Retrieved from http://prescriptions.blogs.nytimes.com/2010/11/29/steep-rise-in-h-m-o-costs/.
