Most health insurers outsource transplant management to companies.University Hospital is a regional leader in the very intense and medically sophisticated area of organ transplants.
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Case 2 University Hospital
(Marginal Cost Pricing)
University Hospital is a regional leader in the very intense and medically sophisticated area of organ transplants. Mark
Lewis, the director of the Transplant Center, has been with the Hospital for ten years. When Mark joined the Hospital he was
put in charge of a kidney and heart transplant program that was averaged 50 transplants per year. Today, the Transplant
Center performs over 200 transplants annually, including transplants from the newly initiated liver, lung, and pancreas
The liver transplant program is the most successful of all organ programs in terms of volume and revenues. Last year, volume
totaled 100 transplants, and this year Mark is optimistic that the liver program can do even better. However, he knows that
increased volume is largely dependent on the number of organ donors and his success in negotiating a new contract with
the Transplant Management Corporation (TMC), the largest transplantbenefits
company in the nation.
Because transplants are relatively rare in comparison with other, more conventional medical treatments, only the largest
health insurers have the expertise to manage transplant services. However, the costs to insurers for transplant services are
typically very large—usually in the sixtosevenfigure
range. To ensure the best and most costeffective
transplant services, most health insurers outsource transplant management to companies, such as TMC, that specialize in
Contracting for transplant services is unique and complex because of the sophistication of the medical procedures involved.
Transplant services consist of five phases: (1) patient evaluation, (2) patient care while awaiting surgery, (3) organ
procurement, (4) surgery and the attendant inpatient stay, and (5) one year of followup
visits. The costs involved in Phase 1
are relatively simple to estimate, but the remaining phases can be extremely variable in terms of resource utilization, and
hence costs, because of differences in patient acuity and surgical outcomes.
Historically, reimbursement for transplant services has been handled in a number of different ways. Initially, many providers
bundled all five phases together and offered insurers a single, global rate. Although this method simplified the contracting
process, the rate set was often chosen more on the
basis of building market share than on covering costs. Indeed, many providers could not even estimate with any confidence
the true costs of providing transplant services.
Somewhat ironically, success in gaining market share usually increases the financial risk of the transplant program because
higher volumes increase the likelihood of higher acuity patients. Although the total costs associated with all phases of a liver
transplant average about $400,000, the amount can more than quadruple if the patient requires a retransplant
or if other
complications occur. Because of this extreme variability in costs, outlier protection is a critical aspect of contract negotiations
if the reimbursement methodology is a fixed prospective rate.
Thus far, several elements of the proposed contract with TMC have been finalized. Specifically, Phases 1, 2, and 5 will be
reimbursed at a set discount from charges. Furthermore, to reduce the amount of financial risk borne by University Hospital,
Phase 3 (organ procurement) will be reimbursed on a cost basis. This makes sense because the cost of Phase 3 is almost
completely uncontrollable by the Center. In general, Phase 4 costs are divided into two categories: hospital costs and
physician costs. Physician costs have already been agreed on, so what needs to be hammered out (and the makeorbreak
part of the contract) is the hospital reimbursement amount for Phase 4.
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