Assignment 2
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Rochester Institute of Technology *
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413
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Medicine
Date
Apr 3, 2024
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Frameworks for Analyzing Health Care Markets
2023
Written Assignment #2
Problem Statement
Suppose that you work in the CEO’s office for a small hospital, called Barker Memorial Hospital. You are in a market with two other small hospitals: Charles Medical Center and Davison Division of Medicine. You are planning for a merger with Davison Division of Medicine to form Barker-Davison Memorial Medical”. Since the two hospitals were geographically proximate they intend to fully merge operations. Before the merger, the three hospitals had no relationship with one another.
In the small metro area where these hospitals are located, there is a very large employer that employs nearly 30% of the working adults. There was one dominant insurer in the region. The insurance contract for the large employer allowed employees to go to any of the three hospitals with no out-of-pocket costs. The insurer had been negotiating separately with all three hospitals. You have information that the large employer is planning to institute a 20% coinsurance for the first $5,000 of hospital costs for all of its employees in the new calendar year. Using your skills on market analysis, please write a memo (in correct memo form) to the CEO, Dr. Morgan Smith, that is a maximum of 1-page (single-spaced with 12-point Times New Roman font) that spells out the following in terms of whether you expect things to do up or down
(i.e., no numerical calculations):
1.
Your expectation of what will happen to the premium that the insurer and large employer negotiate; the premium will impact what the employees are paid and have available to spend on hospital care.
2.
The effect of price sensitivity for the large employer’s enrollees on the demand for hospital care in general 3.
The effect of any economies (or diseconomies) of scale in the merged Barker-Davison Memorial Medical on the cost of care. Be sure to indicate whether you think there will be economies or diseconomies or neither. 4.
In light of (1)-(3) and any between hospital price sensitivity of the larger employer’s enrollees, your expectation of change in the quantity of services demanded at Barker-
Davison, specifically. 5.
Your expectations of the change in prices that Barker-Davison will be able to negotiate with the insurer—both in terms of how they compare with what Barker previously negotiated and compared to what they would be able to charge if the market for insurance were competitive
6.
Your expectation of any necessary change in advertising as quality at Barker-Davison Memorial Medical changes in response to all the other things going on. (Please be sure to describe how you plan to measure quality.)
To: Dr. Morgan Smith, CEO, Barker Memorial Hospital From: Office of the CEO Date: September 26, 2023 Subject: Market Analysis and Strategic Implications for the Barker-Davison Merger
1. Premium Negotiation with Insurer and Large Employer: The introduction of a 20% coinsurance for the first $5,000 of hospital costs by the large employer is likely to exert downward pressure on the premium negotiated between the insurer and the employer. This change will reduce the insurer's risk, thereby potentially lowering premiums. Lower premiums would mean more disposable income for employees, which could slightly increase their ability to spend on hospital care.
2. Price Sensitivity and Demand for Hospital Care: The 20% coinsurance will make the large employer's enrollees more price-sensitive. This could lead to a decrease in non-essential hospital visits, reducing the overall demand for hospital care.
3. Economies or Diseconomies of Scale: The merger between Barker and Davison is expected to result in economies of scale, particularly in administrative and operational costs. This should reduce the average cost of care, making the merged entity more competitive.
4. Change in Quantity of Services Demanded at Barker-Davison: Given the economies of scale and the potential for lower premiums, we can expect a moderate increase in the quantity of services demanded at Barker-Davison. However, this could be offset by the increased price sensitivity of the large employer's enrollees.
5. Change in Negotiated Prices with Insurer: The merged Barker-Davison will have greater bargaining power with the insurer. We can expect to negotiate higher prices compared to what Barker could have achieved alone. However, if the insurance market were competitive, the prices would likely be lower due to increased competition.
6. Advertising and Quality Measurement: As the merger progresses, we should anticipate a need for increased advertising to communicate the enhanced quality and service offerings. Quality will be measured using patient satisfaction surveys, readmission rates, and clinical outcomes. The merger presents both opportunities and challenges. A well-strategized approach will be crucial for leveraging the benefits while mitigating the risks.
Best regards, Office of the CEO, Barker Memorial Hospital
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