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Differential cost analysis: judging a PPO's feasibility.

S R Eastaugh

    Healthcare Financial Management : Journal of the Healthcare Financial Management Association
    |April 10, 1986
    PubMed
    Summary
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    Selecting the right discount rate is crucial for hospital PPO financial success. Differential cost analysis helps balance attracting employers with ensuring hospital profitability.

    Area of Science:

    • Health Economics
    • Healthcare Management

    Background:

    • Developing a Preferred Provider Organization (PPO) involves critical financial decisions for hospital management.
    • The selection of an appropriate discount rate is paramount for the success of a PPO venture.

    Purpose of the Study:

    • To determine the optimal discount rate strategy for hospital-managed PPOs.
    • To analyze the financial feasibility of PPO ventures using differential cost analysis.

    Main Methods:

    • Implementing differential cost analysis to calculate PPO-related costs and revenues.
    • Evaluating the impact of varying discount rates on PPO viability.

    Main Results:

    • Discount rates that are too low may hinder employer attraction and prevent demonstrating savings.

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  • Excessively high discount rates can lead to financial losses for the hospital.

    • Conclusions:

    • Differential cost analysis provides a framework for determining financial feasibility of PPO ventures.
    • Strategic discount rate selection is essential for balancing PPO market penetration and hospital financial health.