Managing Costs at Massachusetts’ Neighbourhood Health Plan

Between 1994 and 1996, Medicaid reduced its rate of reimbursement by 20 percent while the State of Massachusetts imposed higher eligibility requirements for health subscribers, thereby significantly reducing Neighbourhood Health Plan’s (NHP) revenues and threatening its viability.

reducing Neighbourhood Health Plan's (NHP

Reducing Neighbourhood Health Plan’s (NHP

In the past, NHP had controlled costs by controlling hospital bed utilization and increasing preventive medicine. However, no matter how low hospital utilization is, if hospital contract rates are expensive the cost to NHP will be high.

Thus, in November 1995, NHP chartered a project team to help it manage costs through better selection and management of hospital contracts. More specifically, the team’s charter was to develop a method to examine hospital contracts to assure that proposed rates were financially viable to NHP but high-quality care would be available when needed.

The team first selected the top 10 to 20 hospitals based on total annual payments from NHP for analysis. From these they determined that to control costs effectively, NHP’s contracting philosophy would have to change from the current 95 percent of all line items per episode to a fixed cost per episode or per day per type of stay.

The team then constructed a spreadsheet that allowed cost comparisons to be I made across hospitals which allowed management to bargain for lower rates or, if hospitals were inflexible, suggest to health centres what alternative hospitals to refer patients to.

This and later developments by the team significantly enhanced management’s ability to contain their costs while guaranteeing that quality care would be available when needed. It also allowed management to examine and respond to contracts and proposed contract changes in a timely and informed manner.

Source: 1. H. Hertenstein and K. A. Vallancourt, “Contract management = Cost Management,” PM Network, July 1997, pp.31-34.

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