Two-part transfer pricing improves IDS financial control.

Abstract

To help coordinate patient care services across its various provider entities, an integrated delivery system (IDS) must address two financial control matters: design of responsibility centers and selection of an appropriate transfer pricing methodology. Although designating an HMO as a profit center is appropriate, such a designation is inappropriate for an IDS's provider entities. Instead, these entities are more appropriately designated as standard expense centers. Further, an HMO owned and operated by an IDS should purchase patient care from the delivery entities by means of two-part transfer prices, that is, having fixed costs paid for in a lump sum and variable costs paid for on the basis of the actual volume and mix of services provided. The IDS's management must recognize, however, that both case mix and volume lie largely outside a hospital's control and that financial controls should focus on a combination of the hospital's fixed costs and variable costs associated with resources per case, efficiency of resource delivery, and factor prices.