I’d like to know if Boise Park is financially sound. We don’t want our members to be left high and dry if it goes under.

Mr. Lawrence Kern, Executive Director of the Idaho Consumer Health Advocacy Program put down the phone following a call from a representative of Local 285 of the Service Employees’ International Union, the union representing Idaho state employees. A new health plan, Boise Park Health Care Foundation, an independent practice association (IPA)-type health maintenance organization, had recently been offered to 48,000 state employees as a health insurance option. The union representative wanted to know whether to recommend the plan to union members, and he had asked Mr. Kern to assist him. Mr. Kern thought that his first step should be to examine Boise Park’s financial statements for its two most recent fiscal years (Exhibit 1).

BACKGROUND

IPAs are health maintenance organizations (HMOs) with membership open to physicians whose practice habits are sufficiently cost-effective to meet its standards. Member physicians are not salaried by the IPA. Instead, they “join” it by paying a one-time membership fee and agreeing to abide by its policies and procedures.

A successful IPA must set realistic yet competitive premiums. If its premiums are too high, it will not attract subscribers; if they are too low, it will incur operating deficits and possible resignation of the member physicians. IPA premiums typically are approximately $2,500 a year for a single individual, and $5,000 a year for a family, regardless of size.

Most IPA members are primary care physicians (PCPs), who act as “gatekeepers” to care. Subscribers (patients) are required to see a PCP initially for all illnesses, and are not covered for care provided by physicians outside the IPA’s physician “network.” The PCP, is responsible for determining whether to (a) treat the patient without referrals or a hospitalization, (b) refer the patient to a specialist, or (c) place the patient in a hospital. Overall, the PCP is responsible for assuring that medical treatment and hospital costs do not exceed the IPA premium revenue.

An IPA negotiates fee arrangements with specialists and charge arrangements with hospitals. Usually, this entails obtaining favorable per-unit rates. In the case of specialists, the rate usually is a fee for a visit. For hospital care, the IPA must negotiate rates for a wide variety of services, such as per-diem rates for inpatient care, per-test or per-procedures rates for laboratory and radiological services, per-minute rates for operating room use, and per-visit rates for emergency room use, occupational therapy treatments, and so forth. Increasingly, IPAs are negotiating “bundled” or “global” rates for a single hospitalization. The bundled rate puts the hospital and the specialists at risk for any costs that exceed the rate.

If an IPA’s cost of hospital and medical services exceeds its premium revenue, the member physicians usually absorb a proportionate share of the deficit, typically the first 15 to 20 percent, with the remainder covered by re-insurance. The IPA provides a “reserve” for these deficits . . .

Assignment

1. What is the meaning of the account called “Reserve for hospital claims?” How does it relate to the account called “Increase in hospital & medical claim reserves?” Give a hypothetical accounting transaction that would take place in order for a credit entry to be made to this account. A debit to the account.
2. What concerns, if any, do you have about the account called “Membership fees?” Give the transaction that Boise Park uses to record an initial deposit of $667, and the deferral of the remaining $333. How else might this transaction be recorded?
3. Given the information currently available, is Boise Park a good deal for the members (i.e. the physicians who provide care to patients)? It is a good deal for subscribers (i.e. the patients)?