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Richard Grass is the healthcare analyst for Furrnon Investments and is reviewing the investment merits of the developing hospice industry. The hospice industry has a short history in the public market, as several companies have recently completed their initial public offering. Hospice services are provided to patients diagnosed with terminal illness as an alternative to aggressive medical management. The use of hospice services at skilled nursing facilities and assisted-living facilities is forecasted to continue its recent growth.
Medicare is the primary payer for hospice services, accounting for 85% of the approximately $7 billion in industry's revenues. Hospice providers offer symptom and pain management to patients diagnosed with a terminal illness by their physician. The program was added to the Medicare benefit package in the early
1980s. Growth in the sector has only recently. accelerated due to the emergence of a number of for-profit companies. The caregiver provides a plan for each admitted patient and care is given in any number of healthcare environments, including the patient's home.
Grass's analysis of the hospice industry has uncovered several facts that are outlined below:
* The industry's revenue annual growth rate has increased from 14% in the late 1990s to 25% in 2008.
* The average length of stay at facilities for hospice patients is increasing.
* Labor costs account for 75% of total expenses, drugs 15% of total expenses, and medical supplies 10%.
* More than 80% of hospice patients are above 65 years old and 30% are above 85 years old.
* Based on the U.S. Census Bureau's statistics, over the next six years (2009-2015), the number of people in the 65 and older age group will increase annually by 1.4%.
* The Medicare hospice benefit is still underutilized by the terminally ill population, according to MedPac (an independent advisory committee for the U.S. Congress on healthcare issues).
* Only 30% of Medicare beneficiaries enroll in the hospice benefit before they die.
* In recent years, the U.S. government has approved rate increases for the sector compared to flat or declining rate trends for other healthcare services.
* The Medicare hospice program has a beneficiary cap which cannot exceed approximately $18,000 annually per person.
* The top six for-profit providers account for about half of the segment's sales.
* The overall hospice provider market is roughly divided into 55% non-profit, 10% U.S. government, and
35% for-profit.
Grass's analysis has narrowed his search to Hope Company. Hope controls about 7% of the total hospice service market or 20% of the for-profit market. The company has the only regulator approved for-profit certificate for the state of Florida, one of the most attractive markets in the United States. In addition to a strong market share in Florida, Hope has a strong presence in urban markets like Dallas and San Francisco. Hope has a more diversified revenue base than other publicly traded for-profit providers.
Grass is reviewing Hope Company's pricing policy. Which of the following factors is least likely to contribute to the company's pricing policy?
A. Competitors are having difficulty entering many of Hope's key markets.
B. Hope Company relies on many different medical suppliers.
C. Hope Company provides a unique service for its customer.
Answer: B
Medical supplies are only roughly 10% of overall costs and Hope can get competitive pricing from several different suppliers. It is unlikely that medical supplies would force management to alter its pricing. The other answers have greater impact on Hope's pricing strategy. (Study Session 11, LOS 38.0

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