Can anyone explain briefly or direct me to a source that somewhat explains the “Black Box” of HMO revenues. I know that membership premiums are taken in periodically and recorded, but how does the firm then decide what is revenue and what is unearned revenue? Is it based on a survey of what physicians in what areas filed costs for that period? Regional? I know there must be some healthcare experts on here.
Not HMO expert here, but I think revenue recognition at HMO works similarly as regular insurance company. Premium are recognized as earn as the coverage period lapses. Let say you pay premium in Q408 for your 2009 coverage, in Q408 your premium is “unearned” by the HMO. In Q109 your 1/4 of your premium will be “earned”. This may be overly simplified, but think it explains the gist of how their revenue recognition works. Health care cost recognition, however, is a more complicated issue, and is more likely to be the “Black Box” of a HMO P&L. Part of it is the expense is actual claims they received in the period, but part of it is their estimate of the likely claims that has incurred, but have not yet been reported to them.
I think it would be more appropriate to say their earnings are a black box and not necessarily their revenues. They typically receive revenues upfront in the form of premiums and is based on the amount of members they have (unless it’s a Medicare or Medicaid HMO then they may have a cost plus contract where they are paid a percentage above claims at the end of a period). The problem is that when they receive these premiums and record the revenue they have to estimate the health care costs they will have to pay out for claims. This is where it gets tricky. They estimate these costs based on utilization trends as well as the reimbursement contracts they have with providers (ie, physicians, hospitals, etc), among other things.
It sounds like whenever the cogs aren’t easily attached to the sales (or require estimation) then I guess you have some black box potential.