Millions of consumers are enrolled in a managed care organization (MCO) model, and the numbers are
expected to increase over the years. In order to control healthcare cost, employers have moved to
managed care health plans as an alternative to fee-for-service plans. In the fee-for-service model,
providers charge a fee for each service or procedure delivered to the patient. Managed care, however,
provides a range of healthcare products and services to consumers in an effort to keep the lowest
possible cost and to help patients avoid serious health problems.
SCENARIO
You are the chief financial officer (CFO) of a nonprofit organization, Seamus Company, and have been
asked to analyze the company’s health insurance plans for any cost-saving measures. You have also been
thinking of innovative ways to help reduce cost, such as leveraging resources through healthcare
partnerships. Healthcare coverage is the sole principal employee-related expenditure for most employers
(aside from salaries). Employers are shifting the healthcare cost to their employees by encouraging them
to think more about health-related expenses and behavior. Employers increasingly offer incentives to
remove spouses from employee plans. Employers may charge workers extra if a covered spouse has
access to other insurance, or they may pay bonuses when spouses are not on the company policy.
Create a report (suggested length 5–8 pages) that includes the following:
- Propose three fiscally sustainable strategies for Seamus Company from the perspective of a CFO,
moving away from a fee-for-service model to a MCO model.
a. Recommend a plan to carry out each of the three sustainable strategies from part A1 by
including the following:
- cost-saving measures
- tax deductible considerations
- other tax advantages
- fiscal management improvements
b. Discuss two financial management principles of Seamus Company that would support your
recommended plan from part A1a.
c. Discuss how the strategies from part A1 align to Seamus Company’s goals of reducing the costs
of the company’s health insurance plans.
- Choose one of the strategies from part A1 to analyze the use of increased service benefits for
Seamus Company by doing the following:
a. Discuss the healthcare utilization risk strategy that Seamus Company may face.
b. Describe three financial benefits to Seamus Company with the implementation of increased
service benefits.
c. Describe three potential financial drawbacks to Seamus Company with the implementation of
increased service benefits.
Full Answer Section
Part 1: Transition to Managed Care Organization (MCO) Model
A1. Fiscally Sustainable Strategies:
1. Partner with an Established MCO:
- Cost-saving measures: Negotiate lower rates with healthcare providers, leverage economies of scale, implement utilization management programs, and promote preventative care.
- Tax-deductible considerations: Premium payments to the MCO are typically tax-deductible as a business expense.
- Other tax advantages: May qualify for tax credits or subsidies for implementing wellness programs.
- Fiscal management improvements: Streamline administrative processes, reduce claim processing costs, and improve budgeting accuracy.
2. Self-Insure with a Stop-Loss Policy:
- Cost-saving measures: Pay claims directly and avoid administrative fees charged by MCOs, implement targeted cost-containment strategies, and encourage employee participation in wellness programs.
- Tax-deductible considerations: Premium payments for the stop-loss policy are tax-deductible.
- Other tax advantages: Potential for lower overall costs compared to traditional MCOs.
- Fiscal management improvements: Greater control over financial resources and risk management strategies.
3. Develop a Captive Insurance Company:
- Cost-saving measures: Similar to self-insurance, but with greater control over risk and investment opportunities.
- Tax-deductible considerations: Premium payments are initially tax-deductible, but claims may be taxable.
- Other tax advantages: Potential for tax-free investment income.
- Fiscal management improvements: Highest level of control and flexibility, requiring significant financial expertise and resources.
A1a. Implementation Plans:
Strategy 1: Partner with Established MCO:
- Cost-saving measures: Negotiate a multi-year contract with competitive rates. Implement a tiered network with lower co-pays for preferred providers. Encourage employees to use generic drugs and mail-order prescriptions.
- Tax-deductible considerations: Document all premium payments to the MCO and ensure compliance with tax regulations.
- Other tax advantages: Explore available tax credits or subsidies for implementing wellness programs.
- Fiscal management improvements: Utilize data analytics to monitor healthcare utilization and identify areas for cost savings. Implement a robust budget forecasting system to manage costs effectively.
Strategy 2: Self-Insure with Stop-Loss Policy:
- Cost-saving measures: Develop a comprehensive claims management system to ensure accurate and timely claim processing. Implement disease management programs for chronic conditions. Offer incentives for employees to participate in wellness programs.
- Tax-deductible considerations: Ensure proper documentation and reporting of self-insured claims and stop-loss premiums for tax purposes.
- Other tax advantages: Potential for lower overall costs compared to traditional MCOs, resulting in increased tax savings.
- Fiscal management improvements: Implement a sophisticated risk management program to mitigate potential losses. Develop a robust financial reserve to cover unexpected healthcare expenses.
Strategy 3: Develop a Captive Insurance Company:
- Cost-saving measures: Leverage reinsurance options to mitigate risks and manage volatility. Invest surplus funds in low-risk, high-yield instruments. Implement aggressive cost-containment strategies.
- Tax-deductible considerations: Maintain detailed records of premiums, claims, and investments for accurate tax reporting.
- Other tax advantages: Potential for tax-free investment income, depending on the captive's domicile.
- Fiscal management improvements: Establish a dedicated team with expertise in insurance, finance, and risk management. Develop sophisticated financial models to optimize investment strategies and manage financial risks.
A1b. Supporting Financial Management Principles:
1. Risk Management: Implement proactive strategies to identify, assess, and mitigate potential financial risks associated with healthcare costs.
- Compliance: Ensure adherence to all relevant healthcare regulations and reporting requirements.
A1c. Alignment with Seamus Company Goals:
These strategies aim to reduce healthcare costs by:
- Negotiating lower rates with healthcare providers.
- Implementing cost-containment measures.
- Promoting preventative care and employee wellness.
- Sharing risk with MCOs or through reinsurance.
- Leveraging economies of scale through larger networks.
Part 2: Analysis of Increased Service Benefits:
A2a. Healthcare Utilization Risk Strategy:
Seamus Company faces the risk of increased healthcare utilization when offering expanded service benefits. Strategies to address this risk include:
- **Implementing utilization review
Sample Answer
Seamus Company: Financial Analysis and Cost-Saving Strategies for Health Insurance Plans
Executive Summary:
This report analyzes the financial status of Seamus Company's health insurance plans and proposes three fiscally sustainable strategies for transitioning from a fee-for-service model to a managed care organization (MCO) model. Additionally, it examines the potential benefits and risks associated with increasing service benefits within the MCO model.