Profit Maximization of Medicare

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Profit maximization vs. shareholder wealth maximization

Even though profit maximization and shareholder wealth maximization are typical goals of a firm, there are differences between them. Profit maximization relates to a single period and is a short-term goal that is achievable within a period of one year. Most businesses interpret profit maximization to denote an increase in earnings over a given period of time. On the other hand, maximizing the wealth of shareholders is a long-term goal because stockholders of the firm are not only concerned with the current profits but with the future profits as well. Shareholder wealth maximization considers: return of shareholders, timing of returns, wealth in the long run, and uncertainty or risk. Those firms that operate with the objective of maximizing the wealth of shareholders plan their activities in a way that allows them to give stockholders the highest combination of dividends and capital gains accrued from the increased market value of shares (Shim & Siegel, 2008).

Prospective payment vs. retrospective payment

A retrospective payment is a payment received after the delivery of a service or good. A good example is the traditional fee-for-service medicine. A prospective payment allows for the calculation of fee schedules depending on the type of treatment and illness, and is paid in advance irrespective of actual costs incurred. A good example is a case-based payment. The primary distinction between a prospective payment and retrospective payment is that in a prospective payment system the provider retains a portion of the difference between actual costs and revenues established, while in a retrospective payment system the provider fully compensates actual costs and adds a component that represents the small profit amount (Zelman, McCue, & Glick, 2009). In a prospective payment system, the risk shifts from the payer to the provider as the latter is required to pay a given predetermined amount before the admission of inpatients. However, in a retrospective payment system, the providers are able to pass all their costs irrespective of inefficiency in production of services. In a retrospective payment system, providers lack the incentive to look for more efficient production methods while patients lack the incentive to search for providers who provide services at subsidized costs. This is quite different from the prospective payment system where providers have the incentive to provide effective and efficient services since they understand that the more efficient and effective care is delivered by the provider, the more the operating margins are (Casto & Layman, 2006).

Reasons why the unreimbursed cost of Medicare is often not included as an element of community benefit

Unreimbursed cost of Medicare is the actual unpaid cost associated with the provision of care to Medicare patients. It is often excluded as an element of community benefit because of the historical relationship between payment of costs and Medicare. Traditionally, Medicare established payments to those health care facilities that matched expected costs. Even though Medicare is still a substantial amount more than Medicaid, most of the health care facilities have lost money due to beneficiaries of Medicaid (Cleverly, Cleverly, & Song, 2011). The Catholic Health Association of the United States (CHA) and Voluntary Hospitals of America (VHA) guidance stipulates that unreimbursed cost of Medicare should be excluded as a component of community benefit since Medicare losses in some of the health care facilities are linked to inadequacy as opposed to underpayments. America Heart Association (AHA) on the other hand propounds that it should be excluded on grounds that the health care institutions do not get full compensation of costs incurred in the delivery of care to beneficiary of Medicare (United States Government Accountability Office, 2008).

References

Casto, A.B., & Layman, E. (2006). Principles of health reimbursement. Chicago, Illinois: American Health Information Management Association.

Cleverly, W, Cleverly, J, & Song, P. (2011). Essentials of health care finance, seventh edition. Sudbury, Massachusetts: Jones and Bartlett Learning.

Shim, J.K., & Siegel, J.G. (2008). Financial management, third edition. Hauppauge, New York: Barron’s Educational series Inc.

United States Government Accountability Office (2008). Nonprofit hospitals: Variation in standards and guidance limits comparison of how hospitals meet community benefit requirements. Report submitted to the ranking member committee on finance, US Senate (GAO-08-880).

Zelman, W.N., McCue, M.J., & Glick, N.D. (2009). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications. San Francisco, California.: John Wiley and Sons.

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Profit Maximization of Medicare

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