A computerized financial planning model for a health maintenance organization

Richard L Dahn and John R Coleman

Omega, 1982, vol. 10, issue 3, 267-277

Abstract: The time and resource costs needed to plan and start a prepaid medical program or health maintenance organization (HMO) are extensive. It can take up to 3 years to bring one on line and another 3 to 4 years to reach financial stability. Depending on the type of prepaid medical plan designed, the cost can reach $6 to $8 million before breakeven occurs. Because the financial stakes are so high, a systematic and sound business approach must be taken to find that one 'best' design that will survive in the market place. Thousands of hours are required to study all of the possible HMO design configurations. This paper describes how a corporation constructed a computerized financial planning model to simulate the financial behavior of a prepaid medical program with different organizational formats, operational policies and pricing and compensation schemes in varying market, economic and cost environments. Model development and application was a corporate affair. The computerized model provided a special design team with the capability to evaluate the economic impact of many different designs by asking 'what if' questions dealing with several key design and operating variables concerning different health benefit options, service utilization rates, staffing patterns, inflation rates and price and premium schedules. Thousands of hours of design time were saved and the corporation was able to find the 'best' possible design in a reasonable time and at a reasonable cost.

Date: 1982
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