PLEASE ANSWER THE QUESTIONS IN BOLD Youve been asked to help

PLEASE ANSWER THE QUESTIONS IN BOLD

You’ve been asked to help a group of local primary care practice make a decision about the future of their practice. This group of six Family Practitioners has been making ends meet, but they feel that challenges are coming that may force them to rethink the structure of their practice. They have a normal mix of Medicare, Medicaid and Commercial patients. Their revenue comes mainly from direct patient care, with some additional revenue coming from a small in-office lab and the sale of some DME items.

During the past year, the group had the following characteristics – per physician

Patient Service Revenue

Commercial

$175,000

Medicare

$100,000

Medicaid

$25,000

Ancillary Revenue

Commercial

$25,000

Medicare

$20,000

Medicaid

$5,000

Practice Overhead

$175,000

Whatever revenue is left over after paying practice overhead is distributed to the physicians as income. The physicians believe they have three choices:

Option 1 – Stick it out and stay independent. Given current demographic trends, the group believes that demand for Medicare services will rise by 5% per year while demand for Commercial and Medicaid services will fall by 1% per year. The group further believes that Medicare and Medicaid reimbursement rates will stay unchanged, while commercial reimbursement rates can be increased by 2% per year through contract negotiation. Unfortunately, the practice also believes that they will have to increase spending on overhead by 10% per year to keep up with meaningful use requirements

Option 2 – Change their practice to a concierge model. In a concierge model, the practice will charge a subscription fee of $1,000 per year to their patients for the right to stay with the practice. In exchange, the patients who stay with the practice will enjoy greater access to their physician any time by phone and longer visits when they do come in to the office. The practice would end participation with Medicare and Medicaid programs but keep contracts with the major commercial payers. They believe the patients that stay with their practice will average 4 visits per year and that those visits will yield $100 per visit. The practice believes they can get 300 patients per physician to sign up the first year, with an additional 100 signing up in years 2 and 3. They would cap membership at 500 per physician. Annual overhead costs are projected to be $150,000 plus $100 for every subscribing patient.

Option 3 – Accept that employment offer. The local hospital system has offered each of the practice’s physicians an employment contract. The offer is a flat salary of $150,000 per year over three years. The hospital would take over management of the practice, including assumption of all debts and expenses.

Your job – prepare a three-year projection of revenues and expenses under each of the three options. Based only on the financial projections, what would you advise the partners to do? What are the pros and cons of each? If there are any of the underlying assumptions that you’d find fault with? What happens to the model(s) if those are wrong?

Solution

It is problem where six practiciners are practicing now through a consortieum. At present they have three types of patients. They are commercial patients, medicair and medicaid. They earn from them mainly as fees for rendering service. Also some minor ancilaiaries are earned. Cost per anum is deducted from the total revenues to get net revenues per patient. Data for coming three years are shown in the table below. It is option 1.

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There is another option 2 where patients are registered as members with a fixed registration fees of $1000 per annum. It will end medicare and medicaid but commercial payers will exist. Per practicioers revenues under this second option for next three years are stated below:

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In third option fixed salary from employment per practicioner is possible. It is shown below as option 3.

Comment : Out of three options, second one is the best one as it will yield highest net reveue. But it is most complicated proposal and is based on many assumptions. On their failure result will vary sigificatly. Last option has lowest return but has 100% certainty.