Reference no: EM133654996

Problem

Assume that you are the CEO of Space Coast Healthcare, a large regional hospital serving a patient population of more than 300,000. The hospital has virtually no competition and hence dominates the local inpatient services market. However, the local health insurance market is dominated by two large companies: one national in scope and the other a major statewide player. You fear that the purchasing clout of the two third-party payers will put so much pressure on prices that it will be difficult for the hospital to maintain sufficient profitability to ensure financial soundness.

To counteract the market dominance of the payers, the hospital is starting its own managed care company, beginning with a single HMO-style managed care plan. Once the managed care plan begins operations, it will be sending patients to the hospital. Thus, a decision must be made regarding the hospital's pricing policy for its "in-house" managed care plan. Should it price high to maintain strong margins, or should it price low to help the fledgling managed care plan attract members?

What do you think? Does marginal cost pricing or full cost pricing make more sense? Is the optimal pricing strategy the same in the short run as in the long run?