Your local BC/BS plan has experienced high costs and unpredictable cost increase

ID: 2465463 • Letter: Y

Question

Your local BC/BS plan has experienced high costs and unpredictable cost increases for total joint replacement cases in recent years. They have approached three competing hospital systems about taking a case rate for total knee replacements. The ‘case rate’ will cover all diagnostic work, the surgery itself and all rehabilitation needed to get the patient back to full functionality. Last year, BC/BS paid for 1000 total knee replacements in this region, and they project the same volume next year. The working assumption here is that the ‘winning’ bidder will get 100% of that volume next year.

The current breakdown of BC/BS business at these three facilities is as follows:

In addition to the hospital cost for these procedures, you can assume that BC/BS has also paid the following on average per case:

- Diagnostics (all) - $1,000

- Professional (all) - $2,000

- 30% of patients will require post-acute care at a rehab. facility at a cost of $15,000/case

- 70% of patients will go home with home care and other follow-up at a cost of $1,000/case

Mercy

St. Sebastian

University

Total Knee Procedures/ year

500

350

150

Current BC/BS hospital reimbursement/case

$22,000

$21,000

$24,500

Allocated overhead cost/case

$7,500

$8,500

$9,000

Implantable device cost/case

$5,000

$4,500

Other variable costs/case

$2,500

$2,400

For this question, refer to the case study above. Assume you are the orthopedic service line leader of the winning bidder. What strategies will you now employ to be sure your hospital performs well (i.e. profitably) under this new deal?

Given the organizational structure of each system bidding, describe the advantages and disadvantages each faces as they attempt to maximize performance under this contract.