Tulsa Memorial Hospital Case Study

Tulsa Memorial Hospital Case Study
Tulsa Memorial Hospital Case Study
Assignment for Unit 2 – Tulsa Memorial Hospital (SoonerCare)
You are a member of the consulting firm advising Dr Wilson.  The following case study contains the instructions and requirements for the deliverable. 
Tulsa Memorial Hospital is a community hospital in Tulsa, Oklahoma.  Recently, the hospital and its affiliated physicians formed Tulsa Memorial Healthcare (TMH), a physician-hospital organization (PHO).   TMH is close to signing its first contract to provide exclusive local healthcare services to enrollees in SoonerCare (the Plan), the local Blue Cross Blue Shield of Oklahoma HMO      TMH as an alternative.  In the proposed contract, TMH will assume full risk for patient utilization.  In fact, the proposal calls for TMH to receive a fixed premium of $200 per member per month from the Plan, which it then can allocate to each provider component in any way it deems best using any reimbursement method it chooses.  TMH’s executive director, Dr. Randy Wilson, a cardiologist and recent graduate of the University of Oklahoma Nonresident Program in Administrative Medicine, is evaluating the Plan’s proposal.  To help do this, Dr. Wilson hired a consulting firm that specializes in PHO contracting.  The first task of the consulting firm was to review TMH’s current medical panel and estimate the number of physicians, by specialty, required to support the Plan’s patient population of 50,000, assuming aggressive utilization management.  The results in exhibit 3.1 show that TMH’s medical panel currently consists of 249 physicians, whereas the number of physicians required to support the Plan’s patient population is only 61.  Note, however, that TMH physicians serve patients other than those in the Plan.  Thus, the total number of physicians required to treat all of TMH’s patients far exceeds the 61 shown in the right column of exhibit 3.1. Tulsa Memorial Hospital Case Study
The second task of the consulting firm was to analyze TMH’s physicians’ current practice patterns.  Clearly, utilization, and hence, cost is driven by·TMH’s physicians and that variation in practice patterns.   Results of the analysis show significant variation in practice patterns, both in the physicians’ offices and in the hospital.  For example, exhibit 3.2 contains summary data on hospital costs by physician for three common diagnosis related groups (DRGs).  Consider DRG 470 (major joint replacement).  The physician with the lowest hospital costs averaged $12,872 in costs per patient, the highest-cost physician averaged $24,638, and the average cost for all physicians was $14,999.  The consulting firm commented that reducing this variation is important because TMH is at full risk for patient utilization. 
The third task of the consulting firm was to recommend an appropriate allocation of the premium dollars to each category of provider.  Specifically, the contract calls for TMH to receive $200 per member per month, for a total annual revenue of$200 x 50,000 members x 12 months = 120 million.  To reduce potential conflicts about how to divide the 120 million among providers, the consulting firm proposed a “status quo” allocation that would maintain the current revenue distribution percentages shown in exhibit 3.3.
The final task of the consulting firm was to recommend provider reimbursement methodologies that create appropriate incentives.  In the contract, TMH assumes full risk for patient utilization, so the consulting firm recommended that all component providers be capitated to align cost minimization incentives throughout TMH.  Furthermore, capitation of all providers would eliminate the need for risk pools, a risk-sharing arrangement that TMH has never used.  In addition to the consulting firm’s report, Dr. Wilson decided to ask TMH’s new operations committee for a short report on th;e current line of thinking among TMH’s major providers.  The committee provided the following information.
Tulsa Memorial Hospital
Historically, the profitability of Tulsa Memorial Hospital has been roughly in line with the industry.  Last year, when the hospital received about 75 percent of charges, on average, the hospital achieved an operating margin of about 3 percent.  However, hospital managers are concerned about its profitability if the Plan’s proposal is accepted.  The managers believe that controlling costs under the full-risk contract would require extraordinary efforts and that the most effective way to control costs is to create a subpanel of physicians to participate in the capitation contract.  When asked how the subpanel should be chosen, the operations committee  recommended choosing the physicians who would do the best job of containing hospital costs.
Primary Care Physicians
Many of the primary care physicians are dissatisfied.  On average, primary care physicians receive only about 60 percent of charges and are concerned about being penalized by accepting utilization risk for the Plan’s enrollees.  Primary care physicians know that they are paid less and believe that they have to work much harder than do the specialists.  Furthermore, primary care physicians believe that the specialists supplement their own incomes by overusing in-office tests and procedures.  Some primary care physicians are even talking about dropping out of TMH to form their own contracting group, taking away the entire capitation payment from the Plan and contracting themselves for specialist and hospital services.
Specialist Care Physicians
The specialists believe that the primary care physicians refer too many patients to them.  The specialists do not mind the referrals as long as their reimbursement is based on charges because, on average, they receive 90 percent of charges.  However, if they are capitated, the specialists want the primary care physicians to handle more of the minor patient problems themselves.  Also, whenever the subject of subpanels is raised, many of the specialists become incensed.  ”After all,” they say, “the whole idea behind the PHO is to protect the specialists.” Both sets of physicians-primary care and specialist-agree that the hospital is hopelessly inefficient.  Said one specialist, “No matter how much revenue the hospital receives, it still seems to barely make a profit.”
Question 1
What reimbursement method would you recommend for each of the following providers? Be sure to justify your answers.

Primary Care Physicians

Primary care physicians should be paid by capitation, which, however, encourages these physicians to shift patients to other service providers, but the sharing of risk will generate incentives to lower utilization levels of hospitals as well as specialists aligned to patient traffic. Aleternatively these physicians can also be paid service fee on discounted basis which will work as an incentive offer comprehensive preventive care thereby restricting cost escalation in the long run.


Specialists can also be paid by capitation, but then there exist peculiar issue with respect to this mode of payment. Based on estimated patient population of 50,000, the number of physicians required for certain specialities will be relativley smaller. Given as per exhibit 3.1, the number of cardiology, neurosurgery, thoraic, and urology surgeons required is just 1.0 in each case. Around 25 specialists would be optimal, however with lower utilization levels resulting in accretion of lower capitation payments from PHO. As a result of this a small increase in high-cost patients will put physician on the losing side with lower capitation fees. Thus it is wise to pay specialists on a discounted-fee basis, however may be lower than their current reimbursement percentage of 90%.


It is a common practice with managed care plans to pay hospitals on a per day basis and hence make it attractive for physicians to limit admissions and length of stay. This is because hospital utilization can be controlled more effectively by managed care plans than the hospital itself. As a result, payment on per day basis will keep a check on the costs over the long run for the PHO.

Other Services

The utilization levels are lower and unpredictable in this case and such services are often managed by out-of-area providers. Thus they should be reimbursed on fee-for-service basis. Services given by frequent providers can be engaged at discounted contract rates and rest should be paid at actuals.
Question 2
What allocation of premium dollars do you recommend for each provider? Be sure to justify your recommendations.
Though the case provide allocation as guided by the consultant, we have made certain changes to include consideration for risk pool, which was ignored by the consultant. According to us, PHO administration overhead and in-system physicians should be given the greater allocation than what was advised by the consultant. This is because if fixed payments needs to be made to PHO and are made accountable for healthcare needs of the covered population, it needs to be equipped with talent pool of managerial staff and adequate information system which will enable them to exercise control over its components. Further, PHO should be in a position to create reserves (surplus overheads) to cover any such payments to providers on non-capitated basis over and above those allocated.
Primary care should be given higher allocation and specialists and in-system hospital should be given lower allocation than recommended by the consultants in order to set up a risk sharing arrangements within the PHO so as to reduce the amount of specialty and inpatient services provided going ahead. While the primary care physicians’ charges can be increased above traditional rates, the total compensation of specialists and hospital must be reduced in order to run successful PHO. Under the new contract, if utilization levels of these services are reduced, the profitability of specialists and hospital can be increased but with increased pressure on the hospital and specialists under the new proposed revenue distribution. Professional and in-patient services risk pools should be encouraged to get established which will provide financial incentives for promoting more cost effective and efficient practice patterns. Given that rest of categories falls outside the purview of PHO, the recommendations given by consultant seem reasonable.
The new allocation should be phased over next two to three years, instead of pushing from year 1, in order to make hospital and specialists familiar with reduced allocation of reimbursements and understand and respond to newly introduced incentives of risk pools so as to become more productive and efficient. Tulsa Memorial Hospital Case Study
Question 3

What proportion of the premium dollar would you allocate to the professional services risk pool?

Generally, risk-sharing arrangements allocate 10% to 20% of each reimbursement amount to one or more risk pools. Since PHO has never used risk pools in the past, it is prudent to start with 10% with gradual increase in later periods one they become familiar with the risk sharing experience. Since typical allocation of premium dollar for specialists is given as 16%, the allocation to professional services risk is given as 10% x 16% = 1.6% of premium amount and rest 14.4% is allocated to specialists.

How would you split the professional services risk pool between primary care physicians and specialists?

We have taken 50% for each category in order to maintain simplicity.

What proportion of the premium dollar would you allocate to the inpatient services risk pool?

Typical allocation of premium amount for hospital is 33%. Similar to professional services risk pool, 10% x 33% or 3.3% of premium amount is allocated to inpatient services risk pool and balance 29.7% or premium amount is allocated to hospitals.

How would you split the inpatient services risk pool among primary care physicians, specialists, and the hospital?

For simplicity purpose, we have divided this equally among the three parties. Tulsa Memorial Hospital Case Study
Question 4
Conduct a sensitivity analysis. More specifically, using your allocation of the premium dollars, how does the total budgeted reimbursement compare with the total actual reimbursement to primary care physicians, specialists, and the within-system hospital.

If actual payments equal the premium allocation?


If both specialist and hospital payments are 10 percent greater than the premium allocation?
If both specialist and hospital payments are 10 percent lower than the premium allocation?
Do the risk pools provide appropriate incentives to the primary care physicians and the specialists?

If actual payments of hospital and specialists are above 10% over the budgetary allocation, the primary care physicians failed to exercise proper control over referrals to specialists, and specialists failed to exercise proper control over hospital utilization. As a result, the actual reimbursement of both groups is less than the budget.
In case of primary care physicians, the actual payment equals the budgetary allocation given that we chose to capitate them. However, their poor specialist referral program reduces the amount they receive from professional services risk pool from $960,000 to $96,000 and hence indicates that they have incentive to reduce specialist referrals.
In case of specialists, the actual premium payment at $19,008,000 is more than the budgetary allocation given that the physicians are paid on discounted-fee service basis. However, such increase in premium payment is offset by decline in professional service risk pool (reduced from $960,000 to $96,000) amount influenced by poor specialist referral performance of primary care physicians. The amount further gets reduced by inpatient service risk pool (reduced from$1,320,000 to $132,000) due to poor performance of specialists with respect to utilization of hospital. This shows that specialists have clear incentive to reduce hospital utilization. This has also reduced primary care of physicians share of inpatient risk services pool from $1,320,000 to $132,000. v
Above analysis reveal that, the risk pools provide clear incentive for control of specialist referral and hospital utilization.
Question 5

What are some reasons in favor of forming subpanels of the PHO’s primary care physicians to handle only Plan patients?
It makes financial sense to create subpanels to handle only Plan patients.
Primary Care Physicians will have only capitated payments and thus will not have to worry about varying incentive structure based on different reimbursement methodologies.
Overheads would be reduced in absence of need to maintain staff for billing third party vendors.
Risk of each provider on the panel would be reduced given that they would have large number of capitated patients from the Plan.
Of the total 57 primary care physicians, 25 can work on Plan patients and rest on non-Plan patients.
What are some reasons against forming subpanels of the PHO’s primary care physicians to handle only Plan patients?
In reality subpanel may be difficult to create given that only those primary care physicians may be willing to join who do not have full workload of patients and hence may not give requisite numbers.
While some physicians may have lower number patients because of low traffic, others may have because of poor quality of physicians or poor bedside manners.
Voluntary formation of subpanel may create pool of less efficient and effective Team.
Because of full workload by these members, Plan patients, currently seeing other primary care physicians, may be forced to change physicians as would non-Plan patients who are seeing the physicians for the Plan. It will create problems both for the physicians, by losing patients, and for the patients, who would have to change physicians. Tulsa Memorial Hospital Case Study
As a result, keeping competitive forces in mind, restricting Plan patients to lower number of primary care physicians will impact PHO’s revenues.
Should subpanels of the PHO’s specialists be created to handle only Plan patients?

It is easy to create subpanels for specialists. Given that future reimbursements might be less than the current reimbursements, specialists could be polled to find out their interest to join subpanel to serve Plan patients. So long as sufficient numbers are recruited, subpanel may be created for each category. Since they would continue to reimbursed based on discounted-fee for service basis, billing and efforts would remain unaffected.
Question 6
Consider some other actions that the PHO could take to ensure that its contract with the Plan is successful. Specifically, comment on the advisability and feasibility of taking actions in the following areas:

Utilization Review

PHO must be in possession of adequate information system in order to ascertain individual physician referral costs and the costs and effectiveness of alternative treatment methods. Further PHO should convince providers that lower-cost treatment is equally effective compared to higher cost treatment and hence encourage providers to use lower cost methods. Further such review can be used to limit referrals and inpatients utilization to those that are clinically warranted. Tulsa Memorial Hospital Case Study

Quality Management

Better the quality lower will the costs in the long run. Hence use of correct procedure and use it in the first attempt will be crucial. Stressing on quality throughout PHO will lead to higher patient satisfaction thereby ensuring contract renewal with the Plan and a potential driver to negotiate higher payments.

Information Systems

All above actions and performance will become possible only with availability of accurate, timely and structured clinical and financial information. Lack of availability of information will lead to collapse of entire PHO. Hence creation of proper information system infrastructure will be critical for the success of PHO which will help to manage patient population and financial drivers under check. Tulsa Memorial Hospital Case Study
Question 7
What are three key learning points from this case

It helps to build an understanding on premium payment allocation and risk-sharing with an integrated set up – PHO.
It helps to build an understanding on impact of referrals and hospital utilization on premium payments.
It improves analytical skillset with respect to using the case information into a financial model and interpret results basis change in assumptions. Tulsa Memorial Hospital Case Study


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