How Should the Hospital Assign Service Volume to Private Payers Optimally?

U.S. hospitals are confronted with challenges of increasing service volume demand and inequitable payment by different private payers. Under this circumstance, budgeting the medical service volume efficiently and allocating the volume among private payers strategically becomes very important. Our paper proposes a hospital service volume assignment model to provide feasible solutions for hospitals. We develop our base model in the radiology department that provides comparatively homogenous medical service and involves high fixed cost. Under the fee-for-service payment schedule, the base model suggests that the hospital contracting decision with a private payer (insurance company) depends on an intuitive critical ratio. The critical ratio measures the tradeoff between the outsourcing cost generated from the actual service volume in excess of the capacity and the idling cost generated from the actual service volume below the capacity. Besides the base model, we explore two model extensions. First, we examine the criteria to budget the service volume above or below the service volume capacity. Second, we include the processing cost in the cooperation of the hospital and the insurance company. Efficient algorithms are presented for all models. Our findings provide managerial insight on hospital service volume budgeting decision by incorporating inequitable payment information.