Identifying incremental cost in HMO/PPO bid evaluation

While hospitals are implementing case-mix accounting systems, they also may be negotiating prices with health maintenance organizations (HMOs) and preferred provider organizations (PPOs). To aid decision makers in their evaluation of HMO/PPO bids, a matrix that projects the bottom-line effect of various rate and volume options may be useful. Identifying incremental cost--the additional cost incurred if one patient day were added--is the key to this type of matrix analysis. Knowing incremental cost, financial managers can project the effect of a potential loss of current patient volume if a bid is rejected, as well as the effect of a potential shift of patients to HMO/PPO status if a bid is accepted. Although the incremental per diem cost is of chief importance in evaluating bid alternatives, other factors, such as the hospital's potential for growth, opportunity to increase its competitive position, and the impact on community relations and on the medical staff, also must be considered.