Cost Containment Strategies in an Era of Value-based Business Models
Learn how hospitals can proactively control costs to maximize resources to continually deliver quality care to more patients at less cost.
The rising cost of healthcare in the United States is a front-and-center issue for patients, employers, providers, and governmental and commercial payers alike. As a result, the healthcare industry has been driving toward value-based reimbursement models in an attempt to factor in quality, safety measures and the containment of costs.
This transformation is well under way, led by the federal Department of Health and Human Services which is on track to tie 50% of Medicare fee-for-service payments to quality through alternative payment models by 2018. Private payers and the Medicaid expansion programs are moving aggressively on this as well. If you have yet to see the implications from this approach to cost containment and payment reform, chances are high that you will very soon.
Hospital executives and physicians can take specific steps to build in cost containment strategies to reduce costs without sacrificing quality of care. By using cost containment strategies to help control costs, hospitals, medical practices and other key stakeholders will be able to thrive within a value-based business model and keep the organization financially strong.
Healthcare financial trends
Recent reports indicate that many hospitals and physicians are experiencing financial challenges. Operational costs have risen due to constrained revenue cycles with few immediate solutions. The following four key trends support these conclusions:
1. No significant improvements in AR performance
Accounts receivable (AR) performance (the average number of days it takes to collect payment) affects a hospital’s or medical practice’s ability to remain financially strong. Despite the use of billing software systems, hospitals in particular have not seen significant improvements in the amount of time it takes to collect. In fact, AR performance has held relatively steady from 2011 to 2015, and even leaned toward decline at times.1
Because revenue cycle processes blend together and affect one another, a lack of resources in the mid-cycle and business office can negatively affect the overall AR performance. With more resources weighted on the patient access side, a greater number of errors on the back end may occur due to volume and lack of adequate trained resources. The result can create higher staff turnover and a lack of significant improvements in cash flow over time.
Takeaway: The ability for hospitals and physicians to improve accounts receivables by relying solely on software may have peaked. Past improvements through the use of technology and other internal processes are often not enough moving forward to protect cash flow and improve margins.
2. Disproportionate resource allocation
An increase in revenue cycle costs often correlates with inefficient staffing distribution in hospitals as well as medical practices. In 2015, the average number of full-time equivalent for the initial registration step in the revenue cycle remained steady at 35 as compared to 2013. But staffing for mid-cycle processes, however, increased an average of 1-7 employees from 2013 to 2015, with the largest increase in the coding and collections functions.2
Takeaway: These findings indicate an inconsistent staffing distribution that favors front-office personnel, and potentially lacks the staffing necessary for functions that promote timely revenue collection, such as coding, billing and cash posting.
3. Growing revenue cycle expenses
The sharpest outsourcing reduction observed is in long-term collections, with over two-thirds of all recent survey respondents still outsourcing this function. While AR performance has remained relatively stagnant, the overall cost to collect patient service revenue has increased across all performance quartiles. From 2013 to 2015, the full cost to collect payments averaged 2-4% of net patient revenue.3
Takeaway: Costs continue to rise while potential gains in AR for the most part remain stagnant. Healthcare leaders that focus on preventing increases in revenue cycle costs will be better positioned to thrive in a value-based business model.
4. Diminishing return
With an increasing number of hospitals and medical practices merging and becoming part of larger systems, some organizations are experiencing success in terms of cost containment. In a survey of healthcare executives, out of those surveyed who had been involved in a recent merger or acquisition over the past three years, about half (45%) who expected cost savings said their expectations had been met or exceeded. Leveraging economies of scale, centralized purchasing, and other supply-chain efficiencies were the key reasons.4
Looking ahead, when combining hospitals or medical practices, the initial cost savings is often based on a diminishing return because beyond a certain point no further economies of scale will make up for inefficiencies in the revenue cycle process. In many cases, mergers will only magnify the individual procedural issues through the lens of a larger entity.
Takeaway: The cost savings achieved through the centralization of combined services is often a short-lived outcome. Without a sharp focus on services and solutions that help control expenses, the cost savings achieved will most likely be marginalized over the long run.
Healthcare revenue cycle management transformation
Now is time for hospitals and physicians to actively assess their revenue cycle processes outside of the traditional cash flow metrics in order to effectively change and survive in an era of value-based business models.
Traditional cost containment strategies have been adopted by many hospitals and health systems looking to reduce costs in their existing business models; however, basic cost containment methods often don’t add up to the expected savings achieved. With an increased focus on value-based reimbursement models, healthcare leaders will need to consider several critical methods to transform the revenue cycle and increase the value of service.
- Workload balancing
While labor generally represents the largest portion of cost in the healthcare industry – 60% for many – workforce reductions are avoided by most organizations in favor of workload balancing.
Workload balancing is the more efficient use of labor. Because staffing distribution in the revenue cycle is the key factor in rising costs, healthcare organizations need to carefully examine their staffing methods and pay attention to all processes in the cycle based on a balance of both the clinical and financial needs of the business.
For example, hospitals and medical practices have had success working with experienced revenue cycle management partners to provide extended business office functions. These revenue cycle functions range from coding and compliance to denials management and self-pay collections. By securing the additional resources required throughout the revenue cycle process, hospitals and medical practices are able to balance workloads, drive down costs and improve cash flow.
- Utilization of specialized business functions
The increased specialization of certain functions in the revenue cycle process, such as coding, will continue to grow as payers focus on value. In this case, value translates into a higher level of training and oversight in order to manage the increased level of documentation and code set complexities. In response, healthcare leaders will look at how to secure the resources required while alleviating the organization of the internal costs to support demand.
- Business restructuring
Hospitals and health systems that are expanding and spending funds on high labor costs and operations are often strained by their growth. Many health systems that use a physician acquisition strategy, for example, have considerably outgrown their ability to efficiently manage operations among all care facilities, leading to wasted funds. Hospitals and health systems also face cost challenges when they seek additional facility space for revenue cycle or call center staff. From constrained geographic space to house the workforce, to the premium office space prices in some areas, this is something else to consider when discussing cost containment strategies. Restructuring can solve this and other fundamental business problems
A leading strategy for reducing costs in health systems is contracting with a business partner that performs a wide range of functions for the entire group or system. Health systems that adopt this type of shared services model have the opportunity to achieve a great “system-ness” by eliminating redundancy of functions across facilities.6
Key considerations for future cost containment strategies
Current healthcare market conditions are forcing hospitals to transform the way costs are managed and to re-evaluate their business models. Organizations that move swiftly enough to reduce and contain costs can not only survive, but thrive. Those that don’t may not.
Conventional cost containment activities, such as tight inventory and supply management, are not enough to survive in an era of value-based care models. Workforce efficiency and smarter utilization of resources are critical methods to drive down costs and transform the business of revenue cycle management into a highly productive operating function.
Hospitals that proactively maximize resources will continue to deliver quality care to more patients at less cost. Workload balancing is a best practice that requires organizations to plan for the future without sacrificing the quality of care delivered.
While some organizations have already outsourced human resource functions and staffing functions, the opportunity to provide additional resources to the revenue cycle process and effectively deliver a higher service level at a lower cost is another important step to controlling costs.
The bottom line is that traditional cost containment may not be enough, so it’s time for organizations to seriously consider restructuring the business of revenue cycle management in order to cost-effectively operate in tomorrow’s healthcare landscape.
Change Healthcare provides healthcare organizations and their employed physicians as much – or as little – help as they need to optimize all areas of the revenue cycle, including patient access, coding, charge capture, compliance, medical billing and accounts receivable management.
Learn more about our Revenue Cycle Management Services and how we can help you grow revenue and maintain positive cash flow.
1 “ Findings from the 2015 Revenue Cycle Benchmarking Survey.” The Advisory Board Company, December 1, 2015.
4 “ Harnessing Data to Drive Revenue Cycle and Productivity.” 2013.
6 “A Guide to Strategic Cost Transformation in Hospitals and Health Systems.” Health Research & Educational Trust and Kaufman, Hall & Associates, Inc., Chicago: March 2012 http://www.hpoe.org/strategic-cost-transformation