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Identifying incremental cost in HMO/PPO bid evaluation.

R J Annis, J W Holton

    Health Progress (Saint Louis, Mo.)
    |March 11, 1986
    PubMed
    Summary
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    Hospitals can use incremental cost analysis to evaluate bids from health maintenance organizations (HMOs) and preferred provider organizations (PPOs). This financial strategy helps project the impact of accepted or rejected bids on hospital volume and profitability.

    Area of Science:

    • Health Services Research
    • Healthcare Financial Management
    • Hospital Administration

    Background:

    • Hospitals are increasingly adopting case-mix accounting systems.
    • Simultaneously, negotiations with managed care organizations like HMOs and PPOs are becoming common.
    • Effective evaluation of managed care bids is crucial for financial stability.

    Purpose of the Study:

    • To introduce a matrix analysis tool for evaluating HMO/PPO bids.
    • To highlight the importance of incremental cost in bid analysis.
    • To guide hospital decision-makers in financial strategy.

    Main Methods:

    • Development of a matrix projection tool.
    • Identification and application of incremental cost per patient day.

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  • Analysis of potential impacts on patient volume and hospital finances.

    • Main Results:

    • Incremental cost is the key metric for evaluating bid alternatives.
    • The matrix analysis can project the financial effects of bid acceptance or rejection.
    • Financial managers can forecast changes in patient volume and profitability.

    Conclusions:

    • Incremental cost analysis is vital for assessing managed care bids.
    • A matrix approach aids in projecting the bottom-line impact of various rate and volume scenarios.
    • While financial factors are primary, non-financial aspects like growth potential and community relations also warrant consideration.