AZIS R. DABAS / EXECUTIVE ECONOMICS
Test the economics.
Understand the trade-off.
I evaluate healthcare investments through three separate questions: does care improve, which entity captures the value, and what capital is required to deliver it? These five models test the financial mechanisms behind that judgment.
Original illustrative models · USD · Compare presets, pin assumptions, inspect one-variable sensitivity and export your scenario. Inputs remain in this page unless you download a CSV. These are comparative planning models, not regulatory filings or contract settlement calculators.
01 / PAYER
Underwrite the population and the liability.
A payer’s performance depends on earned revenue, the cost of covered care, administrative expense and the accuracy of claims estimates. Keep membership exposure and the accounting period aligned.
Incurred claims = paid claims + closing claims liability − opening claims liability
The liability includes reported-unpaid claims and incurred-but-not-reported estimates. Use the same covered population and accounting basis.Underwriting result = earned premium − incurred claims − administration − other underwriting expense
This simplified model excludes investment income, tax, reinsurance and risk-program settlements; add them in a full underwriting model.Medical-cost ratio = incurred claims ÷ earned premium
This operating ratio is distinct from the statutory medical loss ratio, which uses prescribed adjustments and definitions.ILLUSTRATIVE SCENARIO
- Earned premium PMPM
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- Incurred claims PMPM
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- Incurred claims
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- Operating medical-cost ratio
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- Underwriting result
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- Underwriting margin
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- Cost of 1% higher incurred claims
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The executive read
A favorable reserve movement can improve reported margin without improving the economics of newly written business. I would separate prior-period development from current utilization, unit prices and service mix before using that margin to support growth. The decision is whether the next cohort earns an adequate return under adverse claims development—not whether the aggregate book currently reports a surplus.
Use the model to test the claims deterioration the business can absorb before its underwriting case fails; then assess the cash and capital required to carry that risk. Network access, concentration and benefit obligations remain constraints on the available response. Administrative-services-only fees and client-funded claims require a different perimeter and should not be treated as insured premium and medical expense.
02 / HOSPITAL
Acuity, capacity and contribution must agree.
A hospital strategy links appropriate demand to staffed capacity, length of stay, payment and the resources needed to deliver care safely. Higher volume or a higher case-mix index does not independently establish higher margin.
Before funding new demand, determine whether staffed beds, discharge capacity or a supporting service limits the additional episodes the hospital can safely deliver.
Modeled occupied bed-days = staffed beds × period days × occupancy
A steady-state planning approximation using a consistent inpatient perimeter.Episode equivalents = occupied bed-days ÷ average length of stay
Not a census forecast or a target to shorten necessary care. Actual admissions, discharges, transfers and patient mix require a fuller model.Operating contribution = episode equivalents × (net revenue − variable cost per episode) − fixed operating cost
Use consistent revenue and cost definitions. This is not audited EBITDA or cash flow.ILLUSTRATIVE SCENARIO
- Occupied bed-days
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- Episode equivalents
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- Contribution per episode before fixed cost
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- Operating contribution after fixed cost
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- Break-even episode equivalents
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- Implied break-even occupancy
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The executive read
Case-mix index (CMI) is the average diagnosis-related-group relative weight across the applicable discharges: CMI = sum of relative weights ÷ discharge count. It is not a direct clinical severity score. A change may reflect service mix or documentation as well as resource intensity. Do not mechanically multiply all-payer revenue by CMI.
I would compare a service-line expansion with the best feasible use of the same beds, staff and capital. An attractive contribution per episode can conceal longer stays, higher staffing intensity or displacement of other needed care. The investment earns support only when the additional contribution survives those constraints and the organization can fund the receiving capacity; average hospital occupancy alone cannot establish that case.
03 / VBC
Reconcile settlement, impact and participant contribution.
This is a deliberately simplified symmetric-sharing illustration. It assumes quality conditions are met and applies the same sharing percentage to surplus or deficit. Actual contracts can have very different gates, caps, corridors and reconciliation rules.
Illustrative settlement = (benchmark − actual covered spending) × sharing rate
A negative settlement represents a modeled participant payment to the purchaser.Participant result = settlement − program cost
No other revenue is assumed. Program cost is paid by the participant and is not added again to purchaser spending.Purchaser net savings = counterfactual spending − (actual spending + settlement)
The counterfactual is an explicit scenario assumption, not automatically the contractual benchmark.ILLUSTRATIVE SCENARIO
- Benchmark less actual spending
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- Participant settlement
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- Participant result after program cost
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- Purchaser spending including settlement
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- Savings against assumed counterfactual
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The executive read
A settlement measures performance against a contract; the counterfactual measures the proposed change against what would otherwise have happened. They can point in different directions. I would fund the delivery model only after identifying which value is an actual reduction in resource use, which is a contractual transfer and which remains an assumption. Participant contribution must also cover the work required to produce and document the result.
Contract design should follow that separation. Test attribution churn, benchmark resets, incomplete claims, outliers and quality gates alongside the cash required before settlement. A program that creates patient value but cannot recover its delivery cost needs a revised payment arrangement or an explicit subsidy; a favorable settlement alone does not resolve the funding problem. Read the full underwriting argument ↗
04 / CAPITAL
Charge the business for the capital it consumes.
Compare return with the capital required to sustain it. A larger earnings number can create less economic value when it requires disproportionately more invested capital.
NOPAT = operating profit × (1 − assumed tax rate)
A simplified after-tax operating-profit estimate; excludes financing effects and detailed tax adjustments.ROIC = NOPAT ÷ average invested capital
Use consistent operating profit and capital definitions, including a stated treatment of goodwill, leases and excess cash.Economic profit = NOPAT − (average invested capital × required return)
A one-period analytical measure. It is not market value, cash flow or a statutory capital calculation.ILLUSTRATIVE SCENARIO
- After-tax operating profit
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- Return on invested capital
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- Capital charge
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- Economic profit after capital charge
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- Return less required return
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The executive read
A strong historical ROIC does not establish an attractive return on the next investment. I would compare the incremental operating profit with the incremental capital needed for integration, working capital, maintenance and expansion. Existing assets can make a proposal look capital-light if the resources it consumes are left outside the boundary. Compare alternatives over an appropriate horizon and make the cost of waiting, scaling back or redeploying capital explicit.
Pair the return analysis with liquidity and downside funding. A common operating cash bridge is after-tax operating profit + noncash charges − capital expenditure − increase in operating working capital. Insurer regulatory capital, hospital debt covenants and investor return requirements are separate constraints. Read the capital-allocation analysis ↗
For a risk-bearing insurer, assess underwriting returns against explicitly defined required or risk capital and evaluate investment earnings, reserve uncertainty and permitted distributions separately. Treating all insurer cash as excess cash would distort the analysis.
METHOD & SOURCES
Definitions before conclusions.
The formulas are transparent analytical identities with deliberately simplified assumptions. Primary definitions and recent scholarship support the surrounding interpretation; none of the example numbers is a client result.
- UnitedHealth Group FY2025 Form 10-K: medical-cost ratio, earned premium, claims liabilities and ASO accounting.
- CMS Medical Loss Ratio overview: the regulatory measure has prescribed definitions and adjustments.
- CMS Case Mix Index definition: average DRG relative weight, including transfer-adjustment distinctions.
- CMS Acute Inpatient Prospective Payment System: DRG weights operate within a specific payment method.
- HCA FY2025 results, SEC exhibit: beds in service, observations and occupancy definitions.
THE CONNECTED CARE PATHWAY
Model the work behind the economics.
Trace reach, consent, completion capacity and follow-up through a whole-care service. Compare the resources required with the number of people the pathway can serve.
Open the care-planning lab ↗05 / CUSTOMER & SUPPLIER ECONOMICS
Value creation has two ledgers.
A contract is durable only if the buyer can capture value and the supplier can fund delivery. I use this model to test the feasible fee range after implementation, review and exceptions—not to equate time released with cash saved. Setup occurs at time zero; recurring cash flows arrive at each year-end. Adoption is constant throughout the selected horizon.
If the buyer’s cost-recovery ceiling falls below the supplier’s cost-recovery floor, changing the fee cannot repair the underlying economics. Revisit scope, delivery cost or realized benefit before negotiating the split.
Buyer cash = realized labor benefit − fee − buyer operating cost.
Supplier cash = fee − variable delivery cost − supplier support cost.
Buyer operating cost excludes review effort already deducted above. Supplier costs include delivery and support; corporate R&D, sales and financing are excluded unless entered in those cost pools. Combined value cancels the fee transfer. Non-cash capacity, revenue expansion, quality benefits, taxes and working-capital timing are excluded.
Adoption sensitivity
| Year | Buyer cash | Supplier cash | Buyer NPV | Supplier NPV |
|---|
Illustrative assumptions, not client results. Freed time only enters the cash case at the stated realization rate. When review exceeds gross time released, the added workload is charged in full. Fee feasibility is an undiscounted cost-recovery interval; inspect NPV separately.
FROM THE MODEL TO THE EVIDENCE