Preserving Margins With Value-Based Payments
By Eric W. Canter, MBA, FHIMSS
Senior Consultant and Interim Manager
Hospital revenues are declining, costs are increasing and forecasted volumes are shrinking.
The Patient Protections and Affordable Care Act of 2010 focused attention on eliminating waste in the system. This law also mandated reductions in Medicare payments. As we all know, the shift to value-based payments will focuses on outcomes rather than episodes of treatment and testing.
Maintaining and increasing operating margins over the long term requires daily attention and decisive action in managing revenues and controlling expenses. To be blunt, all of us on the provider side of healthcare must change the way they do business.
In the short term, providers can take several actions to improve margins. These include:
- Redesign revenue cycle processes, denials management, cash collection, and cash acceleration initiatives to increase the receipt of revenue.
- Establish meaningful departmental labor productivity targets, incorporating those into the operating budgets, departmental reporting, and managerial performance reviews.
- Assess supply costs and material management practices, focusing on product utilization with an eye to eliminating overuse.
- Undertake other expense (e.g., insurance, legal, advertising, premium pay, outsourcing) analyses to reduce those expenses by challenging the underlying assumptions that support the expenses and by requiring periodic reviews of the benefits received from those expenditures.
In the mid-term, hospitals should:
- Redesign benefits programs, with attention to reducing costs for current and retired employees, balancing the need to remain competitive in the labor market with the need for reducing expenses.
- Establish evidence-based treatment protocols to eliminate unnecessary inpatient services utilization (i.e, diagnostic and lab testing) and to reduce workloads that drive labor and supplies expense.
- Redesign key processes by eliminating waste and non-value added activities to simplify and streamline workflow (e.g., throughput), adapting LEAN thinking and methods.
- Incorporate more labor saving technologies (e.g., electronic health records, smart phones, web-based registration and appointment scheduling) that are cost-justified and that produce increased efficiencies. Hold those who cost-justified the acquisition of the technologies accountable to achieve the cost savings used to justify the purchase.
Preserving margins over the long term requires sustaining the actions above, while requiring the actions below.
- Avoid duplication of costly medical technology (e.g., laboratory, imaging) by seeking ways to increase utilization of existing services.
- Eliminate services, programs, and locations with marginal or negative incomes that are not core to the organization’s mission.
- Seek strategic alignment among other community providers and organizations, focusing on developing synergistic rather than competitive relationships to achieve improved services, enhanced quality, and reduced costs.
Conclusions
The erosion of operating income, escalating costs, and uncertainty of future investments require hospitals to aggressively manage the revenue and expense side of their organizations. The initiatives briefly outlined above can help hospitals achieve their missions’ in a profitable manner.
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