Case Study: Should My Firm Accept This Contract? You are the manager of a 20-phy
ID: 2758542 • Letter: C
Question
Case Study: Should My Firm Accept This Contract?
You are the manager of a 20-physician cardiology practice. You are getting ready to advise your board about a proposal for capitated specialty care from a local HMO. Data from your fee-for-service practice show billings per member per month of $100 for visits, $80 for catheterizations, and $115 for lab. The practice owns the labs, and the profits are shared among the partners. Your estimate is that costs (aside from physician income) equal 25 per-cent of charges.The proposal from the HMO is for a rate of $275 per member per month. Your immediate reaction is to reject it. Your CFO makes two comments that give you pause: “Our overhead will drop significantly if we accept this proposal and convert 25 percent of our business to capitation. In addition, we should anticipate that our rates for visits, catheterizations, and tests will drop significantly once we convert. ”In this case the town has only two other cardiology groups. You are not sure whether they have been asked to bid or not. Your legal counsel has warned you that direct discussions with your rivals might leave you open to an antitrust suit.
Discussion questions:
• Why is your initial response to reject the offer?
• Why might overhead go down if you accept the contract?
• Why might utilization rates go down?
• What are the risks of accepting or refusing?
• What should you do next? Should you accept the proposal? Should you make a counteroffer?
Explanation / Answer
a)The initial respnse is to reject as the gross profit which we are getting is little less. i.e 275*.75=$206.25
b) Is we accept thw overhead will come down as motst of the fixed cost will be covered by the new contribution income form the HMO Business as they are sharing same premisis of the hospital
c)As most of the people who come will be fro HMO tahn the normal private care by which the present business will be affected by adding this new one.
d)The risks of accepting are the new business may or may not bring high business , the exisiting customers will come down, there will be antitrust issue which will cost high legally, the payment from the governemnt will not be in time by which cash flow will be accepted
e)We should not accep the proposal and continue with the exisiting business.