A SIMULATION OF THE EFFECT OF THE MEDICAID PAYMENT LAG ON THE FINANCIAL POSITION OF COMMUNITY PHARMACIES Developments In Business Simulation And Experiential Exercises, Volume 19, 1990 220 A SIMULATION OF THE EFFECT OF THE MEDICAID PAYMENT LAG ON THE FINANCIAL POSITION OF COMMUNITY PHARMACIES Thomas J. Reutzel, The University of Illinois at Chicago Edward T. Reutzel, Penn State University ABSTRACT Medicaid was enacted in 1965 to bring poor people into mainstream health care. Outpatient drug coverage is a Medicaid service for which pharmacists are paid a dispensing fee and reimbursed for product cost. Pharmacists in Illinois have recently expressed concern over the length of time (“payment lag’) to be reimbursed for services rendered to Medicaid patients. In this paper a simulation model is presented which examines the effect of payment lag on pharmacy financial viability and secondarily the implications of this for society in terms of access to pharmaceutical products and services and the quality of services provided. PAYMENT LAG: A CASH FLOW PROBLEM In order to secure sales that it might otherwise forego, businesses often provide credit to allow customers to make purchases today and pay for them at a later date. If a business is heavily dependent on a single agent (Illinois Department of Public Aid-IDPA) with fiscal responsibility for the purchases of a block of customers, the organization loses its credit management flexibility and is in a high risk cash flow position. Moreover, if the agent chooses to delay payments the situation is exacerbated. This is the dilemma currently faced by many Illinois pharmacies that participate in the Medicaid outpatient drug program. COMPONENT PARTS OF THE MEDICAID PAYMENT LAG The payment lag can b. defined as the sum of the six time periods listed in Table 1. Each “TIME PERIOD n” is a label for the length of time between the dates on the lines immediately above and below it. While the lengths of periods 1, 2, and 6 remain fairly constant, periods 3, 4, and 5 depend on the protocols and procedures of the IDPA and the state Comptroller and are random. In summary, the entire Illinois Medicaid payment lag is made up of three deterministic and three stochastic ‘mini-lags’. THE SIMULATION MODEL The simulation model combines parameter estimates of sales, fees, costs, supplier payment schedules, etc., with probabilistic data on the above payment lags into mathematical relationships that allow the measurement of a pharmacy’s cash flow position vis-a-vis its bank account balance. Specifically, two outcomes were recorded: (1) the daily balance through two years of operation, and (2) the number of days it takes for the account to have a permanently positive balance. The simulation was executed using Lotus 123 with the @RISK add-in program on an IBM microcomputer. Payment lags for periods 3, 4, and 5 were randomly generated from truncated normal distributions and added to the constant lags of periods 1, 2, and 6 to simulate the overall payment lag. A 48 day lag represents the situation when all of the random elements take on their minimum values, a 65 day lag represents the random elements assuming their average values, and an 85 day lag corresponds to them assuming their maximum values. The results show that even when the lag is at the smallest achievable time of 48 days, the account balance does not reach a permanently positive position until day 152 and when the lag is approximately 56 days the end of the year account balance has yet to become positive. Obviously, the expected or average payment lag of 65 days places pharmacies in serious economic straits. Unless they have significant cash resources they can anticipate a severe cash flow problem through their first one and a half years of operation. Interestingly, it takes almost as much time to achieve a permanently positive account balance in the expected case (543 days) as it does in the worst case (554 days). The random nature of the payment lag leads to very uneven inflows of cash and accentuate the timing discrepancy between revenues and costs. DISCUSSION At a management level, these results imply that fairness to Medicaid pharmacies requires that the service to reimbursement lag never exceed about 50 days. As the best estimate of the actual lag in Illinois during spring, 1991 was 108 days, this seems very unlikely. If the pharmacy has an expected account balance of ($18,667) after one year under normal circumstances (65-day lag), the impact of a 108-day lag is dramatic. Faced with these serious fiscal problems, the pharmacy may very well: go out of business completely, withdraw from Medicaid participation, recruit and overcharge non-Medicaid patients, or stock only low cost drugs. These implications are especially poignant in light of the 1990 Omnibus Budget Reconciliation Act, which places demands on pharmacists (record keeping, drug utilization review, counseling, etc.) that increase costs, but does not provide for similar increases in reimbursement or decreases in payment lag. The results of the simulation are understated, powerful, and built on an analytical foundation that makes it more difficult for public representatives to ignore or dismiss them out of hand. What is described here provides an example of the types of analyses available to pharmacists in their quest to improve the health status of their communities and achieve a fair price and prompt payment for so doing. Table of Contents Volume 19, 1992 The Pedagogical Utility of a Management Simulation Game in a Business Policy Course Modeling Economic Environments in Business Simulations: Some Comparisons and Recommendations Experiential Learning and TQM Principles: Teaching Behavioral Science in a Business School The Use of Poster Presentations as a Final Project in the Business Policy Course The Device Business: A Management Simulation for Strategy Formulation The Advantages of Experiential learning in the Auditing curriculum A Framework for the Identification of Moderated and Mediated Performance consequences of Pedagogical Alternatives Simulating Qualitative Research Relating to Values and Lifestyle Segmentation A New Market Demand Model for Business Simulators Interactive Optimization Using the Method of Relative Improvement Preferences: Methodology and Empirical Evaluation The Service Trainer Simulation Benefits of Internet Computer Networks for ABSEL Members How Should We Measure Experiential Learning? An Assessment of Simulation Usage in Management Accounting Courses The Influence of Myers-Briggs Type and Group Dynamics on Simulation Performance Effective Leadership Behavior in the Desert Storm Arena: An Application of the Vroom-Yetton-Jago Model Installing and Consolidating Work-Team Values: The Effects of a Multicultural Outdoors Experiential Program Key Determinants and Decision performance in a Business Simulations and Experiential Learning environment Multi-Cultural Experiential Learning: A Computer Simulation in Indonesia Attitudes Toward and Emotions Related to Women as Managers: A Replication and Beyond Scenario Approach to Simulating Consumer Expenditures: A Cross-Cultural Analysis Insights into Ethical Decision making Activities and Organizational Performance: A Management Simulation Analysis of College Students and Managers Evaluating a Business Simulation Program for Joint Venture Negotiation and Management Teaching Business Interviewing Strategies with an Experiential Approach Cooperative Learning Across the Business Curriculum Modeling Total Quality Elements into a Strategy-Oriented Simulation Teaching Business Decision making using a Simulator Extending the Educational Utility of a Simulated Competition within the Confines of an Established Undergraduate Marketing Curriculum Expert Systems Versus Traditional Methods for Teaching Accounting Issues Confidence Extremes Diminish Quality Performance in a Total Enterprise Simulation Can Ethics Be Taught? A Simulation Tests a Traditional Ethics Pedagogy Through The Looking Glass, Inc.: Organizational Climate Research as Experiential Pedagogy The use of Cluster Analysis for Business Game Performance Analysis Power and Ethnicity: An Experiential Learning Exercise (How to Sensitize Students to Diversity) Directed Development of Critical and Creative Thinking Skills for Case Analysis Implementing Total Quality Management in a Computerized Business Simulation Product Quality in Business Simulations Use of Simulation for Ethics Education in Management Satisfying the University's Customers through Total Quality Management Instruction: A Case Study Personality Characteristics and Group Performance in Total Enterprise Simulations Concepts of Interval Estimation and Quality Control Charts via Computer Simulated Sampling An Examination of the Effect of Team Cohesion, Player Attitude, and Performance Expectations on Simulation Performance Results The Effectiveness of Inventory Management and Production Scheduling Training in a Total Quality Management Environment Peer Group Indicators of the External Validity of Business Games: A five-year Longitudinal Study Political Strategies and Personal Actions Does Practice make Perfect? Observations on Simulation Trial The Use of A Non-Business Computer Simulation to Teach Marketing Management BankPro Commercial Bank Simulation The Production Game Pursuing Excellence: Work Strengths, Assets and relevant Values (An Exercise) Test of a Short Outward Bound Experience for College Students What is it that we want Student To Learn? Using Two TQM Philosophies when Playing Blackjack The Lagged Effects of Decision Variables on Financial Performance Measures Used in Two business Simulations The Development of an Experiential Exercise for Career Planning and Effective Job search Performance Measuring Quality in Management of Business Pedagogy Exploring Quality and Productivity Improvement: Using and Experiential Process Toward a Generalized Architecture for Intelligent Reactive Management Systems The Quality Game TQX: Using Expert Systems to Improve Training in Total Quality Management A Simulation of the Effect of the Medicaid Payment Lag on the Financial Position of Community Pharmacies The Use of a Board of Directors to Evaluate and Validate Decisions in a Competitive Graduate Management Simulation Course The Impact of Academic Dishonesty on Business Simulations and Experiential Learning Activities Picture Project: An Experience of Icebreaking and/or Decision-Making An Effective Role-playing Exercise for Teaching Requisite TQM Supervisory Attitudes/Behavior Computerized Management Simulations and Some Correlates of Students' Satisfaction The Timing and Stability of Reactions to Market Structure in a Single Player Simulation Environment A Graphics Application Extension for a Simulated Decision Support System Environment Aspects of a Group Project Utilizing Actual Business data and a Computerized Accounting System The Role of Universities' Extended Learning Department in Assisting Organizations Implement Total Quality Management A three-dimensional Learning Experience to Develop Total Quality Management Skills Estimating Quality Costs by Computer Simulation Applications and Examples of Quality Control Software Assessing Business Pedagogy A Demonstration of an Experiential Process for Exploring Quality and Productivity Improvement Processes An Action-Ethics Dilemma: A Demonstration Org Sim Jr.: A 2-3 Hour Version of the 2-Day Blanchard/Murrell Organization Simulation Building Buildings: An Experiential Exercise in Organizational Structure, Communication, Leadership and Group Dynamics Expert Systems for Organization Design: A Demonstration A Demonstration of Product Quality in a Business Simulation: Version 2 of CEO Two Revolutions, Total Quality Leadership, and the Baldy: The Story of Milliken Total Quality after the Award - The Xerox Story Building a Competitive Advantage through Customer Satisfaction and Reengineering Human Resource Planning: Managing the Only Renewable Resource for a Competitive Advantage Using Simulations to Teach International Issues: An analysis of the Multinational Management Game's Learning Environment Quality Function Deployment: A Tutorial Care and Nurturing of Teams Making a Good Thing Better: Adding TQM to Participative management Empowering Organizations to Redesign and Transform Themselves - Eastman Chemical Using Simulations in Field Management Development of an International Life Insurance Company Reinforcing the TQ Environment via Simulation Transforming a Business College into a Total Quality College