# What does this tell you about the sensitivity of the price to the assumption of the average cost per case?

This assignment will assess the competency 2. Examine the unique nature of the third party payer system.
Directions: In a word document, work out the financial problems using the information below. Two examples have been given to assist with the graded problems. To earn full credit you must show all your work.

* Review the Adobe Connect Financial Video on Price Setting http://online.adobeconnect.com/p37ymr7dhx4/and the Price Setting Transcript prior to completing the Assignment.

Review the attached examples LP3.2 Practice Financial Assignment before calculating.

Directions: Use the following information to solve the two problems that are listed below.
1. Please use a cover page including your name, date, instructor, and course.
2. For the following problems, start with the price-setting example from the text. The initial assumptions are provided in the attached LP3.2 Table.

1. Start with the original assumptions from the LP3.2 Table. Notice that managed care plan #1 receives a much lower price in return for sending a larger volume of patients. Managed care plan #2 (MC#2) wants to pay a lower cost per case and is willing to send 250 more patients (350 total from MC#2) to the clinic in return for a rate of \$110 per case. Assume that the average cost per case drops to \$90 due to the economies of scale. All other assumptions are unchanged. What is the new required price? Review the LP3.2 Assumptions.

Explanation for part A of the formula in the LP3.2 Assumptions.

A. Look on page 142 and see that we are looking for a loss on the fee schedule and if we come out with a gain on the fee schedule it would be a negative number for the sake of accounting math, since our search is for a loss.

Consider that our average cost went down from \$100 to \$90 to determine our loss on the fee schedule, and that we have 4 fixed prices to consider:
1-Medicare
2-Medicaid
3-Manage Care #1
4-Managed Care #2
In the original assumption we only had 3 fixed prices, but that changed with making MC#2 a fixed price at \$110.

Now determine the change in the fee schedule by looking at the sum of the changes based on the new average of \$90: (Which is \$90 – new pricing)

Medicare 400 patients x \$5 (difference in average price and agreed on price)= \$2000

Medicaid (100 x \$15= \$1500)

MC #1 (300 x \$10 = \$3000)

MC #2 (350 x \$20 = \$7000)

We have no losses in fees, only gains.

The total is \$13,500, but we know that our formula is set-up for losses, so to reverse the effects of a negative search for a positive result we need to change the positive number to a negative number.
Explanation for part B of the formula in the LP3.2 Assumptions
B. We need to calculate the average discount on charge payers and we need to understand that in this problem our charge payers went from 2 to only one from our original assumptions because MC #2 became a fixed payer in our homework problem.

When we have more than one, we add up the discounts according to page 142 in the text, but here we only have one:
(100/100 x10 = .1)

Now plug that into your formula for the “Average discount experienced on charge payers”

2. Start with the LP3.2 Assumptions in the previous question. But now assume that the additional volume does not enable enough economies-of-scale to reduce the average cost per case as much as originally anticipated. Assume now that the average cost per case drops only to \$95. What is the new required price?

3. Compare the last two answers in a 1-2 paragraphs. What does this tell you about the sensitivity of the price to the assumption of the average cost per case? If you were the clinic manager, what would you do before agreeing to the renegotiated contract with managed care plan #2?

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