Converse Health System Case Study

Section 1: Background

Converse Health System operates a network of hospitals and other medical institutions and relies

mainly on fee-for-service. The company bills medical services. The fee-for-service approach

pays doctors a percentage of patient payments rather than a set charge. This payment

arrangement encourages healthcare providers to offer more services, potentially increasing

income.

Converse Health System loses money despite higher income. Healthcare spending outpaces

income. The rising cost of drugs, the expanding number of older patients, and the complexity and

price of delivering care may explain this pattern. Changes in government legislation and

regulations may cut reimbursement rates or raise administrative costs, hurting the healthcare

industry. Converse Health System must overcome these obstacles to continue providing high-

quality care.

Section 2: Problem

The problem faced by Converse Health System is declining profitability, even though

revenue is increasing.

Converse Health System's losses are catastrophic. The company's long-term financial viability

could be improved by diminishing profitability and rising revenues. Profitability helps firms buy

cutting-edge equipment, hire top staff, and deliver excellent patient care.

Converse Health System's profitability decline may have various factors. Labour and capital

costs may have raised healthcare costs. Increased competition may compress corporate margins

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and price setting. Value-based care may be more profitable than fee-for-service. Converse Health

System administration must solve dwindling profits to ensure the hospital's success and excellent

patient care. The management team must identify the cause and create a complete solution.

Section 3: Issues about the Problem

The issues that could be causing the problem include:

The transfer pricing system used by the company, which is based on the average total cost

per case and does not separate fixed and variable costs

Converse Health mechanism's transfer pricing mechanism standardizes prices across

departments. The business uses an average total cost per case system to ignore fixed and variable

costs. This may prevent the organization from accurately identifying and allocating healthcare

costs, which could cost them money.

Knowing the fixed-to-variable cost ratio is necessary for the business to cut expenses without

compromising patient care. Converse Health System's inability to forecast department or service

profitability due to cost separation may also squander money. The company's fee-for-service

strategy may have contributed to its profit reduction. If doctors undertake unnecessary

procedures, this business manoeuvre may fail.

Competition, restrictions, and patient preferences may be lowering healthcare profits. Healthcare

companies that don't adapt may fail. Converse Health System's bottom line may have fallen due

to internal issues like inefficient operations or poor management. Profits may be declining due to

poor cost control and resource misallocation.

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The difference in transfer price per discharge between Case Mix Scenario A and Case Mix

Scenario B, which is causing issues in pricing and profitability

The difference in transfer prices per discharge between Case Mix Scenarios A and B worries

Converse Health System about pricing and profitability. The current transfer pricing scheme uses

an average total cost per case instead of fixed and variable costs, causing this mismatch. Thus, all

discharged patients pay the exact transfer fee. The corporation may be overcharging for more

accessible instances and undercharging for more complex ones, causing an income imbalance.

Case Mix Scenario B's transfer price per discharge may be too low if Case Mix Scenario A

contains more simple instances utilizing few resources than complex cases using many. Case

Mix Scenario B may generate more revenue but less net profit.

Converse Health System is considering creating a transfer pricing system to charge different

transfer rates for different categories of patients based on their complexity and treatment needs.

This method can enhance profitability and ensure the company charges competitive service rates.

Section 4: Analysis and Discussion of the Problem and Issues

If the transfer pricing approach considered constant and variable expenses, the transfer price

would better reflect the actual cost of providing the service. Thus, hospitals would be

incentivized to save costs while receiving appropriate compensation for other hospitals' services.

The transfer prices per discharge vary between Case Mix Scenarios A and B. Hence the pricing

technique should reflect these differences. The variety of cases processed could affect service

fees. Consider transfer price fluctuation across case combinations. Service rates would reflect

actual expenses.

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Converse Health System may need to examine its departments and products for efficiency and

profitability. Hospital and service line profitability analysis can save money, boost output, and

create new revenue streams. The company would maximize its resources and perform at its best.

Hospitals and Converse Health System stakeholders must understand the new transfer price and

pricing plan. If everyone touched by the changes knows why and how they will improve the

organization, there will be less doubt and pushback.

Section 5: Recommendations

Based on the analysis and discussion presented, the following recommendations are made:

Adopt a transfer pricing system that separates fixed and variable costs

Converse Health's methodology should switch to a transfer pricing methodology that identifies

fixed and variable costs to fix its problems. More precise transfer prices and realistic pricing will

increase profitability. Converse Health System can charge its total fee by splitting costs into

fixed and variable levels.

Revising pricing strategy to reflect differences in transfer price per discharge between Case

Mix Scenario A and Case Mix Scenario B

Converse Health System should adjust its price to reflect the transfer expenses per discharge in

Case Mix Scenario A and B. This ensures fair product and service costs. In each Case Mix

Scenario, the corporation may alter its charges to reflect the cost of delivering treatment to

maximize profits and patient care.

Cost-Effective Efficiency

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Converse Health System may cut costs and enhance efficiency to boost profits. Streamlining and

removing steps could lower care delivery costs. The corporation may investigate alternate

healthcare delivery systems that reduce costs without compromising quality.

Marketing and branding

Finally, Converse Health System may advertise and market itself to attract new patients. One

way is to create a catchy brand name, and another is to run advertising that showcases your

company's USP and advantages over competitors. Converse Health System will gain patients and

income by raising awareness.

Section 6: Annotated Bibliography

"Transfer pricing and profitability in healthcare organizations: Evidence from the U.S." by J.

Kim, S. Lee, and S. Lee in the Journal of Business Research (ABDC list A) provides some

insight. Transfer pricing's impact on profits and its moderators is examined. According to the

authors, transfer pricing affects healthcare organizations' profits, and a system that accounts for

all expenses can boost profits. The Converse Health System case study is interesting since this

article discusses transfer pricing's financial impact on healthcare providers.