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Boise Park Healthcare Foundation (B)
Author(s):
Young, David W.
Functional Area(s):
   Finance/Financial Management
   Financial Accounting
Setting(s):
   Health Policy
Difficulty Level: Intermediate
Pages: 4
Teaching Note: Available. 
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First Page and the Assignment Questions:
Earlier, we were concerned that many state employees would be left high and dry if Boise Park went under. Now that many have joined, and chosen physicians for themselves and their family members, BP is asking for a rate increase, which will drive up everyone’s premium. The request seems totally out of line with BP’s needs, and I think you should deny it.

    Lawrence Kern, Executive Director of the Idaho Consumer Health Advocacy Program, was speaking at a meeting of the Idaho Insurance Commission, the regulatory body charged with approving, denying, or amending premium rate increases by the state’s healthcare plans. A few year ago, Boise Park Health Care Foundation (or BP) was a new health plan being offered to the state’s 48,000 employees as a health insurance option. Several thousand employees had changed from another plan to join BP, which offered premiums that were significantly lower than those of its competitors. In the intervening years, many more employees had joined, giving BP a significant share of the Idaho managed care market.

    Now, however, BP was asking for a rate increase that would bring its premiums above those of most of the other health plans. Because many of the BP physicians did not have affiliations with other health plans, a significant number of state employees would be forced to choose between either paying the higher premiums or changing medical providers. For most employees, the latter was an unpleasant prospect.

    Joe Pearlman, BP’s chief financial officer, responded to Mr. Kern’s remarks:

Without a rate increase, we will definitely go under, and then everyone will need to find a new physician. Our liabilities exceed our assets, and, as far as I’m concerned there is no better technical definition of bankruptcy. We have been able to survive for a while because of some positive cash flows, but, in time, with continued operating deficits, cash flows will turn negative, and then it’s only a short while before the coffers are empty.

BACKGROUND

    Boise Park was an independent practice association (IPA)-type health maintenance organization (HMO). IPAs are 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.

Assignment

1.    Why do the accrual and cash results differ? How should these differences be incorporated into the commission’s thinking about a rate increase?

2.     Is Boise Park solvent or not. If so, why? If not, why not, and what must it do to achieve solvency?

3.    Should Boise Park receive a rate increase? If so, how much?

4.    How does solvency and a rate increase relate to intergenerational equity? How does it relate to profitability and liquidity? Should cash or accrual be used to make these judgments?