Analyze a New Managed Care Contract

In this scenario, you are a financial analyst for your healthcare organization, reporting directly to the Chief Financial Officer (CFO). Part of your role is to identify and negotiate optimal financial coverage sources while maintaining quality services for patients. Based on the information provided below, provide an analysis of the pros and cons of entering into a contract with a national managed care organization new to your service area.

Alright Citizens Services (ACS) health insurance company, a national organization that insures approximately 10% of all Americans, is starting to provide coverage to individuals in your service area. ACS is very aggressive and has been successful in every market it enters. ACS will provide commercial, Medicare, and Medicaid products to individuals and companies in your service area. ACS has offered you a five-year contract with the following terms:

Commercial and Managed Care Payors:

• Year 1 payments: 5% below your best payor, equal to your average payment rates.
• An increase in Year 2 of 3% based on the Consumer Price Index (CPI)
• No increase in payment rate in Years 3-5.
• By Year 3, ACS payment rates will be below your average payment rates; and by Year 5, it will be 10% below.
• Capitation payment for outpatient Radiology and Therapy services equal to the average capitated payment from other payors.

Medicare:

• Year 1 Medicare rates + 2%
• Year 2 Medicare rates + 1%
• Year 3 Medicare rates
• Year 4 Medicare rates less 2%
• Year 5 Medicare rates less 5%

Medicaid:

• All years’ rates equal to rates published by the state’s Office of Medical Assistance

If history holds, ACS will gain market share at 2% per year, equaling 10% by Year 5. You are in a very competitive market with five competing hospitals in your primary and secondary service areas.

Using this information, provide an analysis of the pros and cons of your healthcare organization entering into a contract with ACS. Submit a recommendation document and analysis to the Board of Directors that discusses the pros and cons of the financial strategy related to the cost of healthcare outcomes drawn from the resources.