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You are a partner in a group of 15 orthopedic surgeons whose leader is Dr. Cutter Open. Over the years, the group has been aggressive in adopting new technologies and procedures. At present, knee replacement surgery is its major source of revenue, with the surgery being performed at a specialty hospital owned and managed by the group. Dr. Open is proud that the specialty hospital has developed a reputation of being quite a “factory” (in the best sense of the word) for knee replacements. Its outcomes generally have been above average in the region, as far as Dr. Open can tell, and it is the highest volume provider of knee replacement surgeries as well. Taking advantage of its dominant market position, the group has been able to negotiate relatively high fees for professional services, and health plans consider its facility fees to be quite high as well. Other providers have become aware of the profits the group has been able to generate doing knee replacement surgeries, and one community hospital is attempting to hire surgeons to perform these surgeries in its facility. When Dr. Open arrived at his office on Monday morning, he was greeted by an email from the chief financial officer and the network manager of the local BCBS plan. They want to meet with him later that week. (BCBS enrolls approximately 60% of the private sector health plan members in the community but heretofore has not attempted to exercise this leverage very aggressively in contract negotiations with providers.) The topic of the meeting, according to BCBS, is a possible new contractual arrangement between BCBS and the group, for knee replacement surgery. In the email, BCBS documented the relatively rapid growth over the past five years in number of surgeries performed by the group, the relatively high professional fees associated with each procedure, and the high facility fees as well. While Dr. Open was aware of these numbers (his internal reports contained similar findings), BCBS also asserted that the cost of post-surgery follow-up care for the group’s patients was higher than average for the region. (Not having access to BCBS claims data, Dr. Open could not verify that this assertion was true.) The “bottom line” — BCBS wanted the group to agree to accept a “bundled” payment for each knee replacement surgery it performed, with the payment set at the regional average combined cost for a pre-surgical assessment, the surgery itself, and all post-surgical care for six months. Five percent of the total payment would be “withheld,” but returned to the group at the end of the year if it met (to be) negotiated quality benchmarks for surgery and follow-up care. Dr. Cutter Open’s initial reaction was to dismiss out-of-hand the BCBS request for a meeting to discuss its new payment proposal. Their group was the best in the area and “everyone knew it!” And yet… maybe he shouldn’t be so hasty, he thought. Maybe he should discuss the matter first with people knowledgeable regarding the industry and the local market. Although the market in which Dr. Open’s practice is located was not chosen by CMS for mandatory bundled payments, Dr. Open feared that this could change in the future. He forwards the email to you, saying that he would like to meet on Wednesday morning. He would like you to send him a memo the day before the meeting that addresses the following: What is your first impression of the BCBS proposal? Is BCBS being “unreasonable”? Should the group consider it? Why, or why not? (9 pts.) If Dr. Open decides to meet with BCBS, are there particular provisions that he should insist be included in any new bundled payment contractual arrangement? If so, please explain what they should be and why you think they should be included. (9 pts.) What data do you think Dr. Open needs to gather before entering into further negotiations with BCBS? Why? (7 pts.) Your memo should be no longer than four pages (double-spaced, 10 point font or larger). Please include references and citations and put quotes in quotation marks where appropriate.

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