AZIS R. DABAS / EXECUTIVE ECONOMICS
Follow the care.
Reconcile the economics.
Five connected models for the decisions behind a healthcare enterprise: risk, capacity, incentives and capital. Change the assumptions to see where the economic argument holds—and where it breaks.
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 reserve release can improve the reported period without improving the underlying care model. Separate current utilization, unit-price change, service mix and prior-period development before interpreting the margin. A growing book can hide deterioration in a specific cohort.
The leadership decision is how much risk to retain and how to fund it. Review network access, benefit design, claims development, concentration, cash and capital together. Administrative-services-only fees and client-funded claims belong in a different economic model; they 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.
Demand can reach the system faster than the system can absorb it. The constrained step deserves the operating attention.
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.
An acuity strategy must reconcile staffing intensity, cost per case, length of stay, capacity by unit, payer terms and patient outcomes. A service-line expansion that adds attractive cases can still displace other needed care or overwhelm the next bottleneck.
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 positive participant settlement does not prove that the program is profitable or that it caused lower spending. The example makes those differences visible. Patient outcomes, quality, access and equity must be evaluated alongside the financial accounts.
A CEO should stress-test attribution churn, benchmark changes, incomplete claims, high-cost outliers, quality conditions and the delay between funding care and receiving settlement. 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
Return on capital is useful only when accounting boundaries are comparable. An acquisition can appear attractive before integration, working capital, maintenance investment and financing constraints are recognized. A mature asset and a launch-stage program may need different evaluation horizons.
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.
Model the buyer’s cash case and the supplier’s delivery economics together. This annual steady-state scenario separates capacity released from realized cash. Setup occurs at time zero; recurring cash flows arrive at each year-end. Adoption is constant throughout the selected horizon.
A fee reallocates value between buyer and supplier. The operating change determines how much value exists to share.
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