Question

Table: PMPM Rate

Annual                              Copay

                                    Frequency     Unit                   Frequency      Copay       Copay         Net

Category                        per 1,000    Cost     PMPM     per 1,000    Amount     PMPM       PMPM

Hospital inpatient

Medical surgical            400      $1,000    $33.33          100        $150 $1.25 $32.08

Assume that you are the hospital administrator and that the health plan has offered you a capitated contract at the PMPM rate that you computed in problem 1. You believe, however, that you can control utilization better than is reflected in the table above. You believe the actual utilization will be 370 per 1,000 persons. The number of covered lives is 25,000. Your cost per case is $1,100. (For purposes of this problem, ignore marginal costs, contribution margins, etc.)

1. What is the hospital’s total revenue from this contract?

2. Would your hospital realize a profit on this contract?

Answer 1

Per member utilization rate=400/1000=0.4

Annual Cost per member=cost*Per member utilization rate

P1, PMPM(Per Member Per Month)=Annual Cost/12=0.4*1000/12=33.33

Annual copyament per member=per member copayment rate*copayment amount

P2, copay PMPM=Annual copyament per member/12=0.1*150/12=1.25

P3, net PMPM=PMPM-copay PMPM=33.33-1.25=32.08

370 per 1000 and cost of 1100, number of members=25000

Hence, annual cost=370/1000*25000*1100=10,175,000

annual revenue=25000*400/1000*1000=10,000,000

hospital would incur loss and not profit