ODYSSEY HEALTHCARE: A DEPARTMENT OF JUSTICE INVESTIGATION RELATED TO THE FALSE CLAIMS ACT

Journal of the International Academy for Case Studies, 2008 by Newbold, John, Sullivan, Laura

The Impact of Fixed Pricing on Odyssey's Target Market Strategy

With over 90% of their revenues obtained from Medicare and Medicaid, all hospice operators worked under a fixed pricing system. Thus, the revenue function for a hospice operator was linear - a fixed per diem payment over time. The cost function, however, was not linear. The cost of a marginal day of care was relatively high at the onset of care, when there were initial costs of learning about the patient's background, and when the hospice developed a plan for facilitating the move to a hospice environment. Similarly, costs were relatively high in the days immediately prior to death. Between the high costs at the start and at the end of the period of care, costs were lower (Huskamp, et. al., 2001). This pattern of cost was the same regardless of diagnosis. The important implication of the linear revenue function and the U-shaped cost function is this: Longer lengths of stay would yield higher profits. Further, a patient's diagnosis served as a predictor of length of stay: Cancer patients tended to be referred late and have relatively short stays. In contrast, non-cancer patients tended to have longer lengths of stay. For these reasons, there had been a natural tendency of for-profit hospices to target non-cancer patients for admissions.

Managing Patient Length of Stay

Patient length of stay appeared to have the most impact on net patient revenue. For each patient, if length of stay was only a few days, the high costs were spread over fewer days of care, which increased patient care expenses as a percentage of net patient revenue. Consequently, profitability was negatively impacted. Clearly, the ideal scenario for a for-profit hospice was to have each patient stay as long as possible so that the patient care expenses were spread over more days, positively impacting profitability. Thus, Odyssey was faced with a challenge of managing the type and number of their patients in an environment where they were expected to take on all types of cases.

Driving Admissions Growth through Personal Selling

By May 2004, Odyssey had added 17 new hospice sites in just the past 12 months. To assist in ramping up the patient counts in these nascent programs, Odyssey dedicated an increasing share of its operational budget to establish personal selling teams to call on the various referring entities. In some cases, the teams specialized by type of client, such as nursing homes and cancer centers. These referral representatives were referred to as "Community Education Reps" or CERS. In 2004, Odyssey employed more than 200 CERs. They had over 70 hospice sites, with the number of CERs per site fluctuating between 2 and 6 depending on the market conditions of each individual site. Compensation plans were geared around numbers of referrals and types of patients obtained. In January 2004, the compensation plan was modified. Base salaries were set slightly higher than market (i.e., other hospices in each area). Bonuses were established to be awarded after each quarter based upon growth over the previous quarter.