Sunshine HMO 500,000 $15
What are the most likely reasons that the average cost of referral at Magna is higher than at Sunshine? (At this point you should feel free to offer hypotheses, and you could ask your interviewer questions to clarify the information)
Your Answer:
Please take a minute to compose your answer, write it in the box below, and then click on "Answer" below to compare your response to the recommended one.
After reviewing the basics of Magna's business, your team believes that one of the root causes of Magna's financial problems is how it manages medical costs, particularly the cost of referrals to specialists outside of its physician network. Your team has gathered the following information on Magna and its primary competitor, Sunshine HMO:
Number of patients Average cost of referral(per member per month)
Magna Health 300,000 $20
Sunshine HMO 500,000 $15
What are the most likely reasons that the average cost of referral at Magna is higher than at Sunshine? (At this point you should feel free to offer hypotheses, and you could ask your interviewer questions to clarify the information)
Although there are a number of possible responses, you might have the following suggestions:
• Referral pricing: Magna might be paying more than Sunshine for specialist services (e.g. its outside contracts with oncologists might be at higher rates than Sunshine's contracts).
• Number of referrals: Magna's physicians might have different practice patterns than Sunshine physicians, i.e. they may be less comfortable treating heart disease patients or have different training/protocols.
• Mix of specialties: Magna's mix of specialties that requires referrals (cardiology and neurosurgery) are probably more expensive specialties (than cardiology and psychiatry, Sunshine's referral specialties).
• Mix of patients: Magna has sicker or older (>65) patients (individuals over 65 are more likely to need medical care in the specialty areas outside of Magna's network, particularly cardiology).
Your answer was:
What analyses would you do if the things you suggest were contributing to this problem?
Your Answer:
Please take a minute to compose your answer, write it in the box below, and then click on "Answer" below to compare your response to the recommended one.
What analyses would you do if the things you suggest were contributing to this problem?
You might take the following approach, where we’ve outlined different areas of analysis:
• Referral pricing:
o Gain data on prices currently being paid by Magna for a sample of common specialties
o Gain similar data for a competitor if possible for an industry average (perhaps through interviews with non-Magna specialists)
• Number of referrals:
o Interview Magna physicians and non-Magna physicians to see if any obvious behavioral differences exist
o Consult industry publications on this issue
• Mix of specialties:
o Check number of referrals by specialty for Magna and estimate similar for Sunshine
o Interviews with external specialties used by Sunshine may help again here
• Mix of patients:
o Compare demographic data for Magna and Sunshine: should be easy to obtain from Magna; a scan of the employee schemes covered by Sunshine should give a good general picture of their demographic profile
o See if Magna's referral cost has increased in line with the change in demographics of the subscribers
Your answer was:
Helpful Tip
In giving the answer, it's useful if you are clear about how the analysis you are proposing would help to answer the question posed.
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