Arc Electric employees were opting for their health insurance plan. Arc Electric had expanded their workforce due to which more employees were enrolling for Bluefield’s health insurance plan for the benefits. But when Bluefield released that the utilization of their physician services had tremendously increased in the last 6 months because of which their profits were being affected, they had to find out the cause for this.
Soon they realized that the main cause for the increase in the utilization of their physician services was the increase in the number of new employees who were opting for the health insurance plan. Exhibit 1 clearly shows that the number of Arc Electric employees using Bluefield’s Health insurance plan has increased from 3912 in July, 2006 to 4137 in August, 2006. Thus, in only one month the increase has been of 225 people, which is comparatively quite high.
Also, in 2006, the total cost incurred by Arc Electric for inpatient and outpatient hospital services were 203425 and 182440 in July and 212250 and 180700 in August, and for surgical services were 101250 and 103400 in July and August. Thus, the total cost incurred for hospital services and surgical services were 487115 and 496350 in July and August. While on the other hand the total cost incurred by Arc Electric for visits to physician’s office was only 337900 and 391450 in July and August.
Therefore we can see that the difference is almost of 147215 and 104900 in July and August. As Bluefield’s contract with Arc Electric was about to expire the next month, they had to renegotiate the terms in their contract with Arc Electric and request for an increase in their premium rate in order to maintain their profit. They had realized that the main reason for their erosion of profits was the increasing number of Arc Electric employees who had opted for their health insurance plan.
But, Bluefield were also aware of the fact that during renegotiations if they tried to increase the fixed premium which they charged every employee of Arc Electric per month, then they may refuse to do anymore business with them and sign a contract with some other health insurance company. This, Bluefield was not ready to risk. Thus, Bluefield wanted the staff members and directors to devise a renegotiating strategy which they could present before Arc Electric and maintain their contract with them while at the same time see to it that their profitability remains at par.
After much consideration and results from various studies, including Exhibit 1, the employees of Bluefield realized that simply by increasing their copayment charges they will not be able to bring about a decrease in the number of physician visits since people do not actually like to visit the physicians but rather do it in order to remain healthy and fit. The only way they can reduce their costs is by paying less to their health care providers, like the physicians.
Thus, they first needed to negotiate with the physicians and ask them to decrease the costs of services supplied by them. If they simply asked the physicians to lower their cost of service by around 10% or 25% they might do it with the fear that they may loose all of their patients and also be left out of Bluefield’s health insurance plan. But this may have certain negative effects as in return of a lower fee per visit the physicians may also lessen the quality of care that they give to their clients. This is the reason why Bluefield required a further analysis of physicians visit.
Out of the $250 fixed premium that Bluefield charged each employee of Arc Electric every month, the total premium revenue was portioned out as 55% for the hospital and surgical services and 30% for the physician visits. Thus while $137. 5 went for the hospital and surgical services only $75 went in for the physician visits. Thus for every premium collected, the profitability of hospital and surgical services was almost $62. 5 more than the profitability of the physician services. Thus, when compared to physician’s services, hospital and surgical services have a profitability of almost 45% more than the former.