A computerized financial planning model for a health maintenance organization

A computerized financial planning model for a health maintenance organization

O t/EG 4 rhc Int. JI or Mgmt Sc~ ; ol. 10. \ o 3, pp 26" to 2"7, l~)'-," Prln~ed~ Great ~r~tain a,llr~ght~reser~ed 0305-!MS3 52 0~02~-1 i'll)'; I)(~0...

761KB Sizes 3 Downloads 32 Views

O t/EG 4 rhc Int. JI or Mgmt Sc~ ; ol. 10. \ o 3, pp 26" to 2"7, l~)'-," Prln~ed~ Great ~r~tain a,llr~ght~reser~ed

0305-!MS3 52 0~02~-1 i'll)'; I)(~0 Cop'.rlght ~ 14S2 Pergamon Pre',s Lid

A Computerized Financial Planning Model for a Health Maintenance Organization RICHARD L DAHN Blue Cross/Blue Shield of Delaware. USA

JOHN R COLEMAN Wichita State University, Kansas, USA (Received :Vocemher 197;I)

The time and resource costs needed to plan and start a prepaid medical program or health maintenance organization (HMO) are extensive. It can take up to 3 years to bring one on line and another 3 to 4 years to reach financial stability. Depending on the type of prepaid medical plan designed, the cost can reach $6 to $8 million before breakeven occurs. Because the financial stakes are so high, a systematic and sound business approach must be taken to find that one "best" design that will survive in the market place. Thousands of hours are required to study all of the possible H M O design configurations. This paper describes how a corporation constructed a computerized financial planning model to simulate the financial behavior of a prepaid medical program with different organizational formats, operational policies and pricing and compensation schemes in varying market, economic and cost environments. Model development and application was a corporate affair. The computerized model provided a special design team with the capability to evaluate the economic impact of many different designs by asking 'what if' questions dealing with several key design and operating variables concerning different health benefit options, service utilization rates, staffing patterns, inflation rates and price and premium schedules. Thousands of hours of design time were saved and the corporation was able to find the 'best" possible design in a reasonable time and at a reasonable cost.

The H M O concept., an old idea with a new thrust C H R O N I C I N F L A T I O N o f medical care costs in the United States in the late 1960s prompted the Nixon Administration in 1971 to develop a new 'National Health Strategy' aimed at constraining rising health expenditures. The cornerstone of this new strategy was strong Federal support for an alternative way of delivering and financing health care with the intention that it would become an economic competitor of the traditional fee-for-service health care delivery system. The alternative • was called the 'Health Maintenance Organization' (HMO), a term first introduced by Dr Paul Ellwood, who strongly advocated that such organizations would help more to con-

strain costs than just additional regulation of the industry [3]. While H M O s are based upon the principle of prepaid health care, they have four essential characteristics which distinguish them from conventional health insurance plans. These characteristics were used by Health, Education and Welfare (HEW) in 1971 to define H M O s as organized systems of health care that provide a comprehensive range of health maintenance and treatment services to voluntarily enrolled populations in exchange for a prenegotiated, fixed periodic prepayment. The concept is not new; it has existed for more than 50 years primarily in the form of prepaid group practices. Its origin can be traced to the Ross-Loos Medical G r o u p which began servicing employees of the Los Angeles 267

ONE 10 3--D

268

Dahn. Coleman--A Computerized Financial Plannin9 ),lodei

Department of Water and Power in 1929 and to a similar medical plan that provided prepaid medical care to farmer cooperatives in Elk City, Oklahoma, in the same year. HMOs remained an anomaly in the health care delivery system until the 1970s when development was stimulated by the HMO Act of 1973 (PL-93-222) [4]. In the 8 years from 1972 until 1980, their numbers grew from 39 HMOs serving 3.5 million members to 240 HMOs with an enrollment of almost 10 million. By 1988, the US Department of Health and Human Services expects to have 442 operational HMOs serving 20.9 million members [7]. Although acceptance is increasing, the concept remains controversial. Developing organizations still encounter opposition in the traditional medical community and apathy from employers and residents in the service area. Proponents cite cost savings achieved by HMOs. Opponents assert that the same incentives which achieve cost reductions often lead to a decline in the quality of care delivered. At its 129th Annual Meeting, the American Medical Association adopted a report which found that HMOs "probably deliver high quality medical care" [8]. Critics also point out the fact that by the end of 1980 at least 17 HMOs will have failed [9] and that more than 20 of the now 240 operating HMOs are experiencing financial problems and could fail in the near future. Studies of a number of HMOs that have failed since 1978 indicated that the primary causes of failure were substandard planning and poor management.

The complexity of HMO plannin9 and development Creating an economically viable H M O is both a technically complex and costly process. The planning and developmental process normally takes 3 to 4 years. During this time period the HMO will go through three major stages of development (feasibility, planning, and initial development) before becoming operational. At the conclusion of the feasibility, planning, and initial development stages it is necessary to reaffirm that the H M O will be feasible with regard to product acceptance, management and organization, provision of services and financial stability. Because the financial risks can be as high as $6-$8 million before breakeven occurs, systematic planning

processes and rational business decisions are called for in each and every stage of its development. The H MO planning process is an iterative process requiring a design team to examine many different HMO design configurations before it finally selects that one "best' design that comes closest to the design and acceptance criteria established at the very beginning of the planning process. In its search for the ~best' design the HMO design team will have to study and evaluate the economic impact of many environmental factors (e.g. the competition, the economy, regulations) with various combinations of alternative benefit packages, delivery systems, pricing and marketing strategies, financing schemes, and organizational and operational policies and strategies. In its search many key questions have to be answered, namely: • What types of health services should be covered and provided by the HMO? • Where will the HMO be marketed'? • How large a geographic area will be served by the HMO? • What are the demographic and socioeconomic characteristics of the targeted populations? • Will medical care be provided by physicians employed by the HMO or on contract to the HMO? • How are health care providers to be paid by the HMO? • Will the H MO build or rent a medical facility? • What is the maximum acceptable time before breakeven occurs? • What is an acceptable pay-back period of the initial investment? • How will the HMO relate to the parent corporation: will it be an independent corporation, a subsidiary, or merely another line of business? • Will the HMO be a for-profit or not-forprofit corporation? • What will be the expected utilization of the plan's medical and health care services? • What mix of physicians and allied health and paramedical personnel are needed to provide the services? • What effect will changes in the mix of set-

Ome~ja. Vo/. 1< .\,~. .¢

vices to be offered have on plan costs and revenues? • What are the effects of the plan's membership size on annual cash flow and financial security? • What effects will various organizational structures and operational policies have on the financial security of the plan? • What effects will various pricing and provider payment schemes have on plan revenues and costs? Thousands of hours of work may be involved to study the financial viability of each H M O configuration (if it is performed manually) and the closeness of fit to the original design and acceptance criteria is dependent upon the accuracy of the process and the number of times it can be performed.

The financial planning process The determination of financial feasibility of a proposed H M O has been called the 'acid test' [9] of its potential viability. A typical feasibility study may begin with first choosing an organizational arrangement and then conducting a legal feasibility study. Product acceptance and marketing information is then gathered and enrollment projections made for the various target markets and service areas selected. Actuarially sound service use patterns are determined for the set of health services to be included in the benefit package. Administrative and provider staffing need forecasts are made and the number, types and size of facilities projected. At this point, if there are no obvious barriers, these data are combined with enrollment, price, and cost data and delivered to a financial consultant who is expected to answer the key question: "Can the H M O reasonably be expected to provide the required benefits, service its debt and attain fiscal stability within a reasonable time frame?" There are perceived drawbacks to this approach. Frequently the limited resources of the sponsors permit analyses of only one or two H M O design configurations. If calculations are performed manually, such variables as enrollment growth rate, service use rates, population mix and benefits structure must

269

become fixed early in the process in order to proceed. There is little or no opportunity for 'what if" analyses whereby one examines the overall financial impact caused by a series of changes in the value(s) of one or more key design or operating variables. Consequently, a sponsor may be required to make a decision on whether or not to proceed with detailed developmental planning using the results of a single financial analysis, rather than examining several possible alternatives and choosing that one best design that most closely meets the design criteria. One way to avoid these restrictions is to develop a computerized simulation model of the H M O that allows the design team to ask many "what if' questions concerning a number of different marketing, organizational, cost, delivery and financial arrangement assumptions.

Development and use of a computerized financial planning model In 1978 Blue Cross/Blue Shield of Delaware initiated a project to study the feasibility of, and perform the developmental planning for, an H M O in New Castle County, Delaware. A special multidisciplinary project team was organized to study the H M O concept. Individuals were recruited from within the corporation having skills and experience in marketing, market strategy, marketing research, finance, statistics, actuarial science, health care provider relations, economics, and computer and information systems. Other specialized resources were made available on an "as needed' basis; e.g. public relations staff arranged market research surveys and panel discussions, and the legal department performed tasks related to legal issues. Senior corporate management provided the initial statement of objectives and provided a systems study framework in which to operate. The framework used was one of 'new business venture analysis' wherein the project went beyond establishing the economic viability of the H M O to examine how the new venture would affect (1) other lines of business, (2) the plan's relationships with other organizations, (3) the plan's market standing, and (4) the organizational effectiveness and use of corporate financial resources. Using this framework, the team proceeded first to develop a computerized financial plan-

2"0

Dahn. Coleman--A Computerized Financial Planning Model EDIT/CONT"~OL PROGRAM SERV[CE :,R~A 2!.

SERVtCE POPULATION

POPUI~TICX ~

~

S

7_3

U~RS

HYSICI.K~STAFFI>;GREQUR I EMENTS B, SPECIALTY ~ I NON-PHYSrC[~XST~FFI'~GRE~UR I ENENTS L ~ ..~DrCALCLINIC NON-PHf'SICL~N ST~FFINGREQUR I ENENTS ADM[XS l TRATION

,I

IX-] [

FINANCIALANALY

~

R

T

FINA~~ ' CIALBREAK-EVENANALYSIS FIG. I. General structure of the HMO financial planning model.

ning model and then to gather and analyze input data in the critical areas of marketing, finance, enrollment, utilization, prices, costs etc. As a first step in the model construction effort, the corporation obtained a computerized financial planning model for HMOs developed by Coleman & Kaminsky [1]. This particular model had the capability of forecasting costs and revenues of a proposed HMO during the first 5 years of operation, and could be used to determine the various breakeven points and funding requirements under multiple sets of marketing, service use, income and expense assumptions. It also allowed a user to conduct sensitivity studies. Because the model was not developed by corporate staff, it was first necessary to review and modify certain 'resident assumptions' of their model so it would adequately describe the Delaware environment. To gain acceptance of the model, several 1-day seminars were held with senior

corporate staff to review with them the inputs, calculations, outputs, and simulation capabilities of the model. Each part of the model was discussed in great detail. The primary objectives of each session were to: (1) obtain agreement that the model assumptions, data, processes and results and financial techniques and estimates are appropriate; (2) obtain alternative suggestions for assumptions, data, or processes; and (3) define tasks required for further model design efforts. After a final design of the model was approved, substantial amounts of time and resources were expended to gather and validate the input data. The general structure of the model The general structure of the financial planning model is shown in Fig. 1. It contains seven planning models and an edit/control program. The planning models are--Service population, Utilization, Staffing, Space, Revenue, Cost and

Ome~tu. V~fl. IlL \o. 3

271

DETERMINE PROCRA~M

IDE~-rlFY SPECIFIC T ~,RGET ~AR{(ETS

~[~£i~

V/

ACCESS

%~RKETABI LITY TO ACCOUNTS

~CCESS

~j_~,p

MARKETABILITY TO PROSPECTIVE ENROLLgES EST[~t-%TE PREM IU"IS ~.~D OTHER INCOME

]

DEVELOP ENROLL~tENT ROJECTIONS

UTILIZATION •

WILL

SERVICES BE DIRECTLY PROVIDED

OF SERVICES BE PROVIDED

A~MN IS ITRA W TV IM EN IS ITRAT IV IE

141 ESTIMATE

I t3l ESTIMATE II

SPACE EQUIREMENTS,, PACECOSTS

STAFFING NEEDS

STAFF COSTS

DETERm~E I SERVICES

ESTIMATE l[~] ESTIAATE 1141 ESTIMATE j ~'F EALTHCENTER~T~EDICAL AND ~,~REAL TH CENTER SUPPLY HEALTHCENTER SPACE NEEDS AFEING NEEDS QUIRENEN-TS k6I

l

TO BE PURCHASED PURCHASED

'

E

¢ DETERMINE ! REAl(EVEN~ IR FUNDING

.

EQUIREMENTS

FIG. 2.

'

YEAR COST PROFOI~MA S

~

COST OF MEDICALAND HEALTHCENTER HEALTH CENTER SUPPLIES

SERVICES

t-

CEN~'E. SPACECOSTS

HEALTH

T~FF COSTS

{

t

{

J

Process for determining H M O financial feasibility.

Financial analysis. Figure 2 illustrates how the model is used in the HMO planning process by indicating when the different planning models are used in determining the financial feasibility of each HMO to be studied by the design team. The model is written in IBM COBOL and is run in a reabtime environment using a timeshared system. Whenever the design team wanted to examine the economic impact of a particular design change, the design change was entered into the computer terminal and the output reports and graphs describing the results were immediately made available on a CRT and in hard copy form. Table 1 describes the major input data requirements of the model. These data describe the different choices and major decisions that must be made by the design team in order to design and evaluate a particular HMO configuration.

Data input collection and analysis Collecting the necessary information to prepare inputs to the model required extensive coordination of team members. The design team studied each of the seven planning models and the input specifications for the data sets listed in Table I to determine which specific data

were needed, and where, when, and how they could be obtained. Most of the utilization and cost data were obtained from already existing data banks on Blue Cross/Blue Shield members. Information of fees and incomes of physicians in the traditional health care system were used to generate unit costs for the various types of services to be either purchased in the community or to be provided directly by the HMO. The local cost and utilization data was supplemented by utilization and cost data from the studies conducted by Coleman & Kaminsky [2] and from many already existing HMOs. Extensive marketing studies were conducted by the marketing research staff to obtain accurate projections of enrollment and to later obtain actuarially sound premium schedules, copayment schedules and estimates of income resulting from the cooperation of benefits with workers compensation schemes and other group health insurance plans. Design team members with special skills in statistics, finance, economics and actuarial science assisted the marketing research staff in developing accurate and detailed information on the market place and the economy. Specific

Duhn. Coleman--A Computerized Financial Planniny Model

_7_

TABLE I.

DESCRIPTION OF MAJOR SETS OF DESIGN AND OPERATING VARIABLE DATA THAT SERVE AS MODEL INPUTS

Design and operating variable 1. Service area. community and plan member demographics. 2.

Annual enrollment for basic benefits plan and fee-for-service patient populations.

3.

Annual plan enrollment for supplemental benefits.

4.

Service benefits and program options.

5.

HMO services and program delivery options.

6.

HMO facility occupancy options.

7.

Service capacity of medical buildings and facilities used by the HMO. Service utilization rates.

8.

9.

Premium structure for basic and supplemental benefit plans. 10. Annual percentage increases in premiums. 11.

Copayment fee schedules for basic and supplemental plans. 12. Other service charges and annual increases in copayment fee schedules. 13. Service fee schedules for fee-for-service patients. 14. Monthly Medicare cost reimbursement from HCFA. 15.

Other sources of revenue.

16.

Service costs schedules for community providers.

17.

HMO staff compensation schedules.

18.

Fringe benefits, salary increases and labor turnover rates for HMO staff.

19.

Cost inflation rates for hospital, medical, denial, and drug services.

20.

HMO loan and investment interest rates.

Data description The age-sex, income, education and demographic data describing the service area and community population to be served by the HMO. The monthly average number of individual, family, Medicare. Medicaid and fee-for-service patients to be served by the HMO during the first five years of plan operation. Average account penetration rates. and contract size and family size. The monthly average number of plan members who have elected supplemental benefits during each of the first five years of plan operation. The type and scope of service benefits to be offered and provided by the HMO. The organizational format and the delivery system options chosen to provide the service benefits selected. Whether the HMO will build, rent, or renovate space to provide medical services and to house plan administration. The service capacity of medical buildings and facilities to be constructed by the HMO. Age-sex specific use rates per 1000 members for physician visits, laboratory and X-ray procedures, prescription drugs, hospital and extended cai'e admissions, mental health visits, and other services covered by the benefit plan selected. Initial monthly premium rates and loading factors for each enrollment category. The annual increases in premium prices for each basic and supplemental benefit plan by enrollment category. The point-of-service charges for services rendered to HMO enrollees. Other fees for services rendered to HMO enrollees and annual increases. Fees charged non-plan members for HMO services and the annual increases in such fees. The average per month cost reimbursement from HCFA for services to members covered by Medicare. Annual estimated income to the HMO from coordination of benefits with other group health insurance plans and from other sources. The contractual costs to the HMO for contracting with hospitals, physicians and other health service groups within the community to provide health services to plan members, These costs are on a capitation or fee-for-service basis. The annual base salary for all physicians and non-physicians employed directly by the HMO including those in plan administration. The annual percentage rates of salary increases for physicians and non-physicians employed directly by the HMO. Also included are the percentage rates for fringe benefits and the annual turnover rates for physician and non-physician staff. Annual rates of cost inflation for all inpatient and outpatient care services, Includes hospital, physician, dental, optical, and pharmaceutical services and medical and administrative supplies. The annual interest rates and payment periods fo( capital borrowed from HEW (now HHS) and/or commercial lenders to meet construction costs and operating deficits. Annual interest rates for funds (loans and/or profits) deposited in savings accounts or other short-term investments.

Omega, Vol. [ ~ .\o. 3

273

HNO GROUP '-IODEL " PREP&ZD '4EDICAL PLAN FZN%XCIa.L STATE",~ENT A.'(D ANALYSIS CHART

FIX,.\.~C',\[, ST~,TE~-IENT

YE\R

1 2

COSTS

R~VE:';UE

53,139,632 57,135,853

PROF[[- (OR LOSS)

52,022,-t02 ( $ 1 , £ 3 7 , 2 3 0 ) S6,275,311

(¢,1 162,542)

3

512,I37,~[5

¢,11,61a,454

($575,581)

~'

$16,668,228

$[7,2"b,586

$608,358

3

52[, 154,578

525,647,675

~2 0 , 0 ~ , 0 0 0

r

x

I 17, $00,C00

~l 5,0OO,OOO

x

X X x

x x X X

52,513,297

PLAN qE~!SERS

PL,LN USERS

4,587

4,887

2

12,4'{0

12,980

3

20,753

2t,253

27,607

28,157

33,784

34,334

x X × x

COST REV '

l

l I 0,000,000

X

I ~ 7,500,000

X

x x

x ~ 5,000,000

5

S / y S T

X

x x

~l Z,500,O00

YEAR

F[N%";CIAL ~-NALYSIS CHART

iz.5oo, ooo

'//

COST / /.," /REV

I COST/ x"

/

x X yEA~ I

YEAR 2

Y~AR 3

YEAR 4

YEAR 5

FIG. 3. H M O group model Sample fina,wial statement and analysis chart.

enrollment target markets were identified by size, type and location of employer, and by residence location of prospective enrollees. Meetings and panel discussions were held with representatives of a large sampling of employers to measure their interest in offering the H M O option to their employees. A statistical survey of residents was conducted to measure their interest in joining an H M O , to measure their perceptions of the quality of the traditional health care delivery system, and to collect demographic and employment statistics. H M O enrollment projections were made by subtracting from the total population the number of those who would be unlikely or unable to join. This total projected enrollment was taken as the anticipated enrollment at the end of year five of operation. Projections for the prior years were extrapolated after estimating how many enrollees could be served and the number of enrollment accounts that would be opened and closed during each of the first 4 years. Demographic information such as contract mix, family size and the age-sex distribution of the sample were later combined with financial and economic data to prepare actuarially sound premium rates. Health economists and financial experts provided estimates on the annual increases in the

costs of operation and the cost of capital over the first 5 years of plan operation.

Analyzing model output reports More than 20 separate reports and graphs are generated by the model. These reports describe the enrolled population of the HMO, the projected utilization of services, the annual staffing and space needs of the HMO, and the revenue, cost and financial condition of the H M O during the first 5 years of operation. During the initial stages of H M O planning, the most useful of these reports are the Financial Statement and Analysis Chart and the Financial Breakeven Analysis Chart, Figs 3 and 4 respectively. These present the 'bottom line' of each configuration studied. They contain such information as the month in which breakeven will occur, what enrollment and premiums are projected to be at breakeven, and a statement of costs, revenues, and profit (or loss) for each year. Other reports are more useful during the later phases of planning when operating procedures and policies are being refined in an attempt to develop a best fit to the original design criteria. Reports are produced giving projections of the H M O ' s staffing and space need requirements; the number of health ser-

Dahn. Coleman--A Computerized Financial Planning Model

274

PREPAID MEDICAL PLAN FINANCIAL BREAKEVEN ANALYSIS CHART BREAKEVEN S T A T I S T I C S

BREAKEVEN ~;ALYSIS CHART

{, r. z,'r6.~

x

RE~

ENROLLMENT INDIVIDUAL MEMBERS FAMILY MEMBERS

I

3,081

/ REV .COST / / REV COST

~l s,~5o,671 x ×

20,574

x ~15,824,756 x

MEDICAREMEMBERS

R~ ¢V COST / /

x

/

MEDICAID MF2,IBERS

FEE FOR SERVICE

il 5,098,841 X x

525

TOTAL PLAN USERS

./COST RE v P

x

..................................

&COST

~14,372,926 X

24,180

,MONTHLY PREMIUNS ................

7

x

x

INDIVIDUAL-GRPI

$67.43

IND IVIDUAL-GRP2

$67.43

s~

I~ 3 , 6 4 7 , 0 1 i x

CO /,REV

x

~lz,92r,Os6

MEDICARE PLAN

$00.00

MEDICAID PLAN

$00.0O

COST

x x

/ COST / C O S T REV

~z,195,J ap × / x REV x" × × x xx)c~xxxx:~tx:~xx~x)ocxxxxxx~ , x x x x x ~ o ~ x ~ t x x ~ c t I

2

"a

4

5

6

"t

0

~

IO

×xx~o( t I

12

FIG. 4. HMO group model. Samp/e financia/ hreaket'en ana/y.~is chart.

TABLE 2. SAMPLE 5 YEAR PRO FORMA EXPENSE SCHEDULE HMO

g r o u p model

Prepaid medical plan. (Pro]brma HMO expense schedule (S) year of operation) Plan expense category

Year 1

Year 2

Year 3

Year 4

Medical services Short term inpatient care Long term inpatient care Psychiatric in patient care Dental care program Vision care program Home care program Mental health program Out-patient drug program Out-of-area services Ambulance services Catastrophic & emergency Renal dialysis Other benefits Community services Plan administration Carry over losses Debt service Earnings or admin, reserves Amortization Other

1,438,668.15 702,968.00 13,260.00 18,768.00 0.00 19,928.94 6,375.00 42,510.58 158,769.01 14,661.00 336.00 68,418.00 0.00 0.00 0.00 619,150.88 0.00 218,434.83 20,224.02 35,595.33 0.00

2,928,836.79 4,719,946.00 6,459,290.93 2,157,601.60 3,864,754.53 5,529,144.69 47,028.80 88,707.84 130,395.72 66,563.84 119,661.87 182,366.77 0.00 0.00 0.00 62,427.79 114,198.25 167,111.07 18,892.50 33,970.75 49,472.49 133,443.70 244,152.68 357,284.00 452,457.86 7 5 2 , 7 0 4 . 7 5 1,001,391.51 38,940.00 63,759.00 84,471.00 999.46 1,800.12 2,623.38 199,892.00 360,025.82 524,677.53 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8 4 9 , 4 3 6 . 3 8 1,117,602.02 1,454,153.38 175,303.(30 179,205.00 88,386.00 441,731.49 551,864.34 551,864.34 50,000.00 50,000.00 50,000.00 35,595.33 35,595.33 35,595.33 0.00 0.00 0.00

Annual total expenses

3,378,067.74

7,659,150.54

AVG plan membership (total) AVG plan users (total)

4,387 4,887

12,480 12,980

12,297,948.30 20,753 21,253

16,668.228.14 27,607 28,157

Year 5 8,272.152.57 7.264,540.14 180,816.48 253.459.31 0.00 224,961.30 66,429.00 481,015.52 1,225,533.62 103,002.00 3,518.78 703,757.73 0.00 0.00 0.00 1,717,731.96 0.00 551,864.34 50,000.00 35,595.33 .000 21,134,378.08 33,784 34.334

2-75

Ornega, I,ot. I~), ,Vo. 3 TABLE 3. SAMPLE NON-PHYSICIAN STAFFING REQUIREMENTS REPORT

HMO group model Prepaid medical plan. (Non-physician stalling requirements-medical clinic) Service personnel category Primary medical care program Clinic administration Nursing services Laboratory radiology, PT services Secretarial/receptionist/clerical ser vices Other ancillary services Business office Housekeeping-custodial services Dental care program* Dentists Dental assistants Hygienists Other dental auxiliaries Out patient drug program* Pharmacists Pharmacy support personnel Vision care program* Ophthalmologists Optometrists Opticians Other vision care personnel Out patient mental health program* Psychiatrists Psychologists Psychiatric social workers Secretarial/receptionist/clerical services Total non-physician personnel

Year 1

Year 2

Year 3

Year 4

Year 5

3.00 12,79 4,90 4,01 0£7 0.97 1.00

3,00 19.20 8.38 5.41 1.64 2.59 1.00

3.00 25.75 1t.95 6.96 2.06 4.25

3.00 31.22 14.92 8.26 2.40 5.63

3.00 36. ll 17.59 941 2.70 6.86

1,130

1.00

1.00

0.50 0.75

0.50 0.75

0.50 075

0.50 0.75

0.50 0.75

1.25

1.25

1.25

1.25

1,25

0.87 0.78

2.49 2.24

4.15 3.73

5.52 4.96

6,75 6.07

0.09

0.25

0.42

0.56

0.68

0.t6 0.24 0.32 1.00

0.43 0.64 0.86 1.00

0.70

0.93

1.14

1.06

1.40

1.71

h41

1.87

1.00

1.00

2.28 1,00

27.4

41.22

54.97

66.43

76.67

* The services are not provided directly--therefore the staffing needs are not included in the total.

vices to be r e n d e r e d ; a 5 year revenue analysis r e p o r t by type a n d source of revenue; a 5 year cost analysis r e p o r t by expense c a t e g o r y ; a 5 year pro forma revenue a n d expense b u d g e t ; a n d a financial s u m m a r y r e p o r t i n d i c a t i n g funding r e q u i r e m e n t s a n d interest costs to cover o p e r a t i n g deficits. T a b l e s 2 a n d 3 c o n t a i n o u t p u t r e p o r t s for one of the H M O designs e x a m i n e d by the design team. T a b l e 2 is a 5 year pro forma expense schedule of the H M O . T a b l e 3 indicates the n o n - p h y s i c i a n staffing needs of the H M O . The end use of the v a r i o u s H M O design r e p o r t s d u r i n g the H M O p l a n n i n g process will vary with the skills a n d H M O experiences of design team m e m b e r s . If a t e a m m e m b e r is relatively unfamiliar with the H M O c o n c e p t a n d o p e r a t i o n s , the i n f o r m a t i o n can be used to check for reasonableness. O n e can clearly see from the r e p o r t s w h e t h e r or not specific p r o g r a m segments (such as p h a r m a c y or vision

care) are financially self sufficient, being subsidized b y or subsidizing o t h e r segments. These d e t a i l e d r e p o r t s offer an o p p o r t u n i t y to e x a m ine plan cost a n d revenue e s t i m a t e s on a line item basis to be certain that the H M O is c o m petitive a n d that it reflects the "real world'.

Sensitivity analysis R e c o g n i z i n g the fact that m a j o r shifts in e n r o l l m e n t a n d u t i l i z a t i o n patterns, costs, prices, p r e m i u m s , a n d the general state of the e c o n o m y can j e o p a r d i z e the financial success of the H M O , several sensitivity a n a l y s e s were c o n d u c t e d b y the design team. Sensitivity runs were m a d e by the team to d e t e r m i n e the sensitivity of b r e a k e v e n points a n d cash flow schedules to m o d e r a t e and m a j o r changes in e n r o l l m e n t projections, hospital use rates, hospital and medical cost inflation rates, p r e m i u m prices, a n d o t h e r key variables. F o r the H M O b e i n g d e s i g n e d in this project, it was found that

276

Dahn. Coleman--A Computerized Financial Planning Model 725

PAYS/1000

700

OAYSI I000

675

DAYS/iO00 ............

. . . . . .

650

DAYS/I000

. . . . . .

625

DAYS/I000

...........

PROFITS/LOSS

: .......................................................................

~,oo0,ooo

.I 625 D A Y S / 1 0 0 0 ~.. ." 4 650 D A Y S / 1 0 0 0 ." # I • ,, .~j 675 D A Y S / 1 0 0 0

.....................................................................

3,000,000

:__,;._,,.;, 0 o ." I

.

.'¢.'/J

2,000,000

.............................................................

,.ooo.ooo

........................................................

725 D A Y S / I O 0 0

..;S-... .'p

0

".

.-° ... -" J

I

,

....

\.

-I,O00,O00

..............

-2,000,000

.....

: _ ~. ~: ,.,=_~._=.;. ,, ~ - 5 . ~

,,

.............................

I I

0 FIG. 5.

+. . . . . . . . . . . . . . . . . . . . . . .

5

I0

, ...........

15

20

25

, ...........

30

35

, .....

40

4.5

. .....

, .....

50

55

+I

60

H M O group model. Cash-flow curves for various hospital days per 1000 members (21/6/78).

most of the significant operating variables that are considered to be controllable, as well as some that are not controllable by management, could be changed by more than 20~o before severe negative impacts were encountered by the HMO. Figures 5 and 6 contain cash flow curves for two of the sensitivity studies conHOSP : IIOSP: flOSP: IIOSP:

12% 15% 12% IS~

HED : MED: MED: MED:

ducted. Figure 5 illustrates the sensitivity of breakeven when hospital use rates vary from 625 days per I000 members to 725 days per 1000 members. Figure 6 shows the delay in attaining financial breakeven when the annual increases in hospital and medical costs go from 12 and 10~ to 15 and 13~ respectively. More

10% 10% . . . . . . 13% . . . . . . . . . . . . 13% . . . . . .

PROP I T S / L O S S 3,000,000

........................................................................

2,S00,00¢

..................................................................

2,000,000

..................................................................

[,S00,O00

..............................................................

I

--o~IIIOSP: i2~'~, HED: 10~'~

_/_~

T/-'qHOSP:

-

HOSP:

/.','i

..............................................................

1,000,000

oo,ooo

.~/__,.,Z__2,i,z ....

,"

0

1571 ,',lE[):

]O?~

'.

/m /"

I

. . . .

-I,000,000

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

- 1 , 5 0 0 , 0 0 0

. . . . .

. . . . . . . . . . . .

5

IO

, . . . . .

is

~ :

. . . . . .

zo

MONTH

FIG. 6.

13';

J . " - - ' .... / il

.....................................................

_,oo,ooo

12'< ~IFD:

",'~- :- ...............................

. . . . . . . . . . . .

zs

30

, . . . . . . . . . . .

3s

40

,

. . . . . .

4s

I ,

. . . . . . . . . . . .

so

ss

6o

OF O P E R A T I O N

H M O group model. Cash-flow curces for carious rates of inflation for hospital and medical services (21/6/78).

Omeqa. Vot. ll). \o, 3

than a dozen such sensitivity studies were conducted by the design team in its search for the "best" H M O design.

Conclusions Computer simulation can be a very valuable and cost effective technique for analyzing the financial viability of an HMO. By constructing an interactive computerized model of the HMO, a design team can closely examine the economic and operating characteristics of many different H M O design options quickly and accurately. A properly constructed financial planning model allows the design team to study many more designs than are possible when the analyses involve manual calculations. While a computerized financial planning model saves both time and money it does not replace the need for collecting sound planning and input data and making intelligent decisions. This still remains a substantial portion of the H M O design effort. By combining a 'business venture analysis' framework with detailed statements of objectives and design criteria, the design team can quickly converge on the one "best' design that will be acceptable to management. There are no two H M O s that are alike--all 240 are different. Each H M O has unique characteristics, therefore it is unreasonable to expect that a single model would be capable of dealing with all conceivable variations. Consequently, those who are considering the use of an already designed computerized financial planning model are urged to learn the model in detail. All programs and algorithms being employed must be generally understood, and to obtain maximum effectiveness, the corporate user should modify algorithms as appropriate to best suit the local design environment. The effectiveness of this entire process is considerably enhanced if the design team contains a member familiar with computer techniques, and if the programs can be modified and run in a real-time, on-line environment. If financial modeling techniques are to achieve even moderate effectiveness, they must be viewed as corporate tools and they must be basically understood, trusted and accepted by all levels of the corporation directly and peripherally involved. It is the responsibility of the model user to see that this occurs as others are

2"7

unlikely to volunteer their time to understand it independently. Project managers especially must overcome any tendencies toward disinvolvement or to blindly trust the financial planning model. Financial modeling of a new business venture provides the corporation an opportunity to ask many "what if" questions early in the design process. This helps the corporation to avoid many false design starts and improves the decision making capabilities of the design team. Computer aided decision making is becoming increasingly important in today's corporate decision making processes but it can only enhance the creative problem solving and design processes when the model developed is used in a knowledgeable way, with sound data, and with the support and understanding of all involved. REFERENCES 1, COLEMAN JR & KAMINSKY FC (1977) A financial planning model for evaluating the economic viability of health maintenance organizations. Inquiry 14(2), 176-188. 2. COLEMAN JR & KAMINSKY FC (1977) Designing Medical Services for Health Maintenance Organization (Ambulatory Care Systems), Vol. 4. DC Health, Lexington, Massachusetts, USA. 3. ELLWOOD PM JR (1971) Restructuring the health delivery system--will the health maintenance strategy work': In Health Maintenance Organizations: a Reconfiguration of the Health System, pp. 2-23, University of Chicago, Illinois. USA, 4. US CONGRESS (1973) The Health Maintenance Organization Act. PL 93-222. The H M O Amendment Act of 1974. PL 94-460. The H M O Amendment Act of 1978. PL 9'$-559. Washington DC, USA. 5. US DEPARTMENT OF HEALTH, EDUCATION AND WELFARE (1971)Towards a Comprehensive Health Policy

for the 1970s. White Paper, Washington DC, USA. May. 6. US DEPARTMENT OF HEALTH, EDUCATION AND WELFARE (1979) National HMO Census of Prepaid Plans, June 3(J, 1979. Office of Health Maintenance Organizations, Rockvitle, Maryland, USA. 7. U S DEPARTMENT OF HEALTH, EDUCATION AND WELFARE': (1979) National HMO Development Strategy

through 1988. Office of Health Maintenance Organizations, Rockville, Maryland, USA. 8. US DEPARTMENT OF HEALTH AND HUMAN SERVICES (1980) A MA reaches "almost positive" stand on H M Os. HMO Focus 3(5). 9. U S DEPARTMENT OF HEALTH, EDUCATION AND WELFARE (1974) H M O Feasibility Study Guide. Bureau of

Community Health Services, Washington DC, USA. ADDRESS FOR CORRESPONDENCE: Professor

JR Coleman, Department of Health Administration and Education, College o/ Health Related Pro/essions. Wichita State University, Wichita, KS 67208, USA,