A case mix simulation decision support system model for negotiating hospital rates

The institution of prospective payment systems by many health care insurers has drawn increased attention to case-based financial planning in hospitals. When hospital revenues are directly linked to patient diagnoses rather than to the types and quantities of services supplied to patients, managers must be aware of the financial implications of different case mixes and must be prepared to influence insurers' price structures. A case-based financial planning model is presented here for the purpose of assisting managerial decision making in the strategic areas of case mix planning and pricing. The computerized model characterizes hospitals as product manufacturers, the product being discharged patients. Diagnosis serves to differentiate the "products"; however, diagnoses are grouped by payor and similar treatment cost experiences to create a limited set of managerially meaningful case types. Diagnostic and treatment costs are also aggregated to facilitate the modeling of the hospital production process. The computerized model projects the number of patients of each case-type and total patient volume, based on estimated patient volume growth rates. The model also projects prices and contribution margins for each case-type, as well as total contribution to hospital overhead. Testing the model with a hypothetical example of a hospital strategic planning problem demonstrates the model's potential as a decision-making aid in case mix planning and case-type pricing. It also reveals several model shortcomings that require further developmental effort.