WEEK ONE - Volume to Value 

Appendix B Homework Assignments 

You are the Administrator of Omega Health in Central City. Omega Health is a large for-profit, multidisciplinary clinic which provides a range of primary and specialized care. The clinic is owned by five physicians in the group. All your patients come from a single contract with the Alpha Group, a consortium of large businesses in Central City. Alpha Group has agreed to pay you $100 per visit on a fee-for-service basis. 

Assume you have the following data from the prior year: 

Patient Visits: Revenue: Variable Costs: Fixed Costs: 

75,000 $7,500,000 $2,000,000 $5,000,000 

For the coming year, assume one of these three scenarios: 

a. A new insurer Beta wants to contract with you to cover its insureds, which would increase visits by 15,000 per year (to 90,000) and Beta will pay the same amount per visit as Alpha. You can accommodate the increased number of patients with out any changes to the size of the clinic or its equipment.  

b. The Mayor informs you that Central City, with a federal grant and a donation from Alpha, is starting free health fairs and employee health programs which are expected to dramatically improve the health of Central City’s workforce. Indeed, Omega Health’s mission statement is to “Improve the Health of Central City”. You estimate that your patients’ improved health will reduce patient visits to 50,000 per year. 

c. Alpha wishes to end its fee-for-service payments, and instead to negotiate a “Value Program” with a capitated payment of $7,500,000 per year, irrespective of the number of patient visits. 

QUESTIONS:

1. How much profit did Omega make last year?

2. What is Omega’s profit if it enters into the Beta contract? 

3. Assume you do not get the Beta contract. Are you excited about the Mayor’s initiative? What

effect is the Mayor’s plan going to have on your profitability? If the owners want to maintain the current level of profitability and you cannot change the variable costs or renegotiate your contract with Alpha, what has to change and by how much? 

4. Assume the Mayor’s program is delayed, and you still do not have the Beta contract. If you entered into the capitated payment contract with Alpha, how many patient visits do you want to maximize your profitability? Does this change your enthusiasm for the Mayor’s program?