Case Study: Should My Firm Accept This Contract?

You are the manager of a 20-physician cardiology practice. You are getting ready to advise your board about a proposal for capitated specialty care from a local HMO. Data from your fee-for-service practice show billings per member per month of $100 for visits, $80 for catheterizations, and $115 for lab. The practice owns the labs, and the profits are shared among the partners. Your estimate is that costs (aside from physician income) equal 25 percent of charges. The proposal from the HMO is for a rate of $275 per member per month. Your immediate reaction is to reject it. Your CFO makes two comments that give you pause: “Our overhead will drop significantly if we accept this proposal and convert 25 percent of our business to capitation. In addition, we should anticipate that our rates for visits, catheterizations, and tests will drop significantly once we convert. ”In this case the town has only two other cardiology groups. You are not sure whether they have been asked to bid or not. Your legal counsel has warned you that direct discussions with your rivals might leave you open to an antitrust suit.

Discussion questions:

• Why is your initial response to reject the offer?

• Why might overhead go down if you accept the contract?

• Why might utilization rates go down?

• What are the risks of accepting or refusing?

• What should you do next? Should you accept the proposal? Should you make a counteroffer?