A Model for Sensitivity Analysis of Reimbursement in Hospitals

Abstract

Hospital rate setting and financial planning decisions are complicated by the fact that 70% to 80% of the operating revenues generated from patients are covered by third parties (namely Blue Cross, Medicare, Medicaid). Reimbursement by the third parties for services is associated with a host of regulatory constraints which govern the cost finding procedures used, as well as the cost and rate increases allowed. In this paper we present two models to aid the hospital's financial decision makers understanding of the sensitivity in the cost allocation process. The models provide a means by which the decision maker can obtain answers to such questions as: “What is the impact of an increase in cost of Y, in the cost center D, on the total cost of revenue center M?” Management use of the above information is discussed. The paper illustrates the use of models in performing sensitivity analysis as opposed to brute force methods commonly used.