Cost and Revenue Strategies

Healthcare executives who have embraced the task of determining the true cost of providing care at their organizations are in a better position to offer transparency, and see doing so as a competitive differentiator in the healthcare industry.

This article first appeared in the June 2017 issue of HealthLeaders magazine.

In an ideal world, business leaders are able to maintain financial growth and stability simply by driving down costs and preserving or even increasing revenue through conventional means. However, the healthcare industry—with its mix of third-party payers, for-profit and nonprofit entities, and increasing reimbursement pressures—creates unique challenges for its leaders.

Note that the healthcare industry is making steady progress—the transition from fee-for-service to value-based care encourages healthcare organizations to embrace a financial and clinical mission of providing high-quality care at more affordable costs.

According to the 2017 HealthLeaders Media Cost and Revenue Strategies Survey, for example, 49% of survey respondents say that the transition from fee-for-service to value-based care has either significantly improved or somewhat improved their cost containment efforts, and only 24% say that this has significantly hindered or somewhat hindered their efforts. 

However, while positive change is being achieved through healthcare reform efforts, progress is moving at a slower pace than many would prefer. In the interim, traditional methods such as driving down costs through purchasing and supply chain efficiencies and maximizing revenue collection through disciplined revenue cycle practices remain effective strategies.

Further, initiatives focusing on process redesign and care standardization, to name just two, are also yielding positive results. But one issue that remains an obstacle is the industry’s inability to determine the true cost of delivering care.

True cost of care

Survey results reveal that the biggest barrier to achieving sustainable cost reductions is the lack of data on the true cost of care (58%). This is followed by a closely grouped series of responses that cover a range of different areas: insufficient integration with care partners (45%), lack of technology in place to achieve goals (34%), with lack of patient engagement in their care (33%) and regulatory compliance (33%) in a tie. Responses are fairly evenly spread across most of the factors, an indication that achieving sustainable cost reductions touches on all aspects of provider organizations.

While most providers recognize the need to determine the true cost of providing care, actually being able to collect and analyze this data is another matter. For example, 36% of respondents say that they can determine the true cost of care for all (6%) or most (30%) care provided, and 51% say they can do this for some care provided, but 13% are unable to determine the true cost for any of the care they provide.

These results are nearly identical to last year’s survey: 6%, 29%, 51%, and 15%, respectively, and more improvement will be needed for providers to succeed in controlling costs and delivering value.

While responses for unsupportive organizational culture (23%) finish near the bottom of the response list, it remains a point of emphasis for most providers due to the critical role it plays in the implementation of cost containment initiatives. 

"The most important opportunity that we deal with is culture change and change management," says Chad A. Eckes, MBA, executive vice president of corporate services and CFO at Wake Forest Baptist Medical Center, an integrated health system in Winston-Salem, North Carolina, that operates more than 1,000 acute care, rehabilitation, and psychiatric care beds, and offers outpatient services and community health and information centers. Eckes also is the lead advisor for this Intelligence Report.

"We have the data and technologies in place. We know all of these things. We don’t think it’s going to adversely impact quality or safety. The biggest thing is getting people to standardize their approach to doing things and realize that cost management and reducing some of the waste is as important as the rest of their job."

Price transparency

Price transparency is increasing in importance for the healthcare industry as patients have become more actively involved in the process of being healthcare consumers, and in response to the growing use of high-deductible plans.

For example, survey results reveal that 40% of respondents are able to provide price transparency to patients for all (12%) or most (28%) care provided, 41% say they can do this for some care provided, and 18% are unable to provide price transparency for any of the care they provide. 

Note that responses indicate that physician organizations are further along in providing price transparency than hospitals and health systems.

For example, a greater share of physician organizations (58%) than hospitals (35%) and health systems (33%) say that they provide price transparency to patients for all or most care provided. Still, these organizations report double-digit responses for being unable to provide price transparency for any care delivered: 24% of hospitals, 18% of physician organizations, and 13% of health systems. 

Eckes says that Wake Forest Baptist Medical Center identified price, cost, and quality transparencies as key development initiatives several years ago. 

"Bringing transparency to our costs, in general, has been a core focus of ours for the last three years, and there’s a couple elements to that: having the pure, raw financial data, then having analytic systems that are able to drill down to the process level and look at it from an activity-based costing perspective, and then being able to do the same view but at a service-line level. One of our key focuses is you can’t manage what you can’t measure, and we had to put those measurement systems in place."

Healthcare quality transparency

Another critical aspect of the industry’s move to transparency is the need to address healthcare quality transparency. The good news is that nearly three-quarters (73%) of respondents say that they provide healthcare quality transparency to patients for all (34%) or most (39%) care provided, while 20% say they can do this for some care provided, and only 7% are unable to do this for any of the care they provide. 

Survey results for healthcare quality transparency reveal some interesting correlations with both value-based care and the ability to determine the true cost of providing care, likely because both require in-depth study and analysis of provider organizations’ processes and costs.

For example, responses for providing healthcare quality transparency to patients for all care provided are higher among respondents who say the transition from fee-for-service to value-based care has either significantly improved or somewhat improved their cost containment efforts (40%), compared with respondents who say that this has had no impact on their efforts (30%) or significantly hindered or somewhat hindered their efforts (25%).

Further, responses for providing healthcare quality transparency to patients for all care provided are higher among respondents who say they can determine the true cost of care for all or most care provided (47%), followed by some care provided (29%) and respondents who have no data on the true cost for any care provided (16%).

Transparency: Threat or opportunity? 

For the most part, providers appear to welcome the advent of greater transparency in healthcare. For example, more than three-quarters (81%) of respondents indicate that the industry shift to price and healthcare quality transparency represents an opportunity
for their organization, while only 11% say that it is a threat. Nine percent don’t know.

Interestingly, responses for price and healthcare quality transparency as an opportunity are higher among respondents who say the transition from fee-for-service to value-based care has either significantly improved or somewhat improved their cost containment efforts (88%), compared with respondents who say that this has significantly hindered or somewhat hindered their efforts (70%) and has had no impact on their efforts (68%).

In addition, responses for price and healthcare quality transparency as an opportunity are higher among respondents who say they can determine the true cost of care for all or most care provided (85%), followed by some care provided (81%) and respondents who have no data on the true cost for any care provided (68%).

These two findings indicate that provider organizations that have undergone the demanding process of value-based transformation or that have embraced the difficult task of determining the true cost of care for their organization are in a better position to offer transparency, and they see this capability as a competitive differentiator.

Operations and clinical cost containment 

According to respondents, purchasing and supply chain efficiencies (60%) and process redesign (54%) provide the two highest dollar values in cost containment contributions for organizations’ operations/administrative activities in the most recent fiscal year—the results are comparable to last year’s survey: 64% and 58%, respectively.

Forming a second tier of responses are targeted budget reductions (39%), consolidating/

centralizing business functions (39%), and reducing incomplete or inaccurate coding (37%).

Purchasing and supply chain efficiencies continue to be an area of focus for providers, and there is no sign that it has reached diminishing returns. Eckes says, "I don’t know one organization that believes they’re completely tapped out on purchasing and supply chain efficiencies. In my opinion, this is just one of those things where as you shine a light on efficiencies, you see the improvement, and the minute that you’re not shining that light on it, you see the opportunities creep in again."

Perhaps not surprisingly, survey results for process redesign reveal a correlation with value-based care.

For example, responses for process redesign are higher among respondents who say the transition from fee-for-service to value-based care has either significantly improved or somewhat improved their cost containment efforts (63%), compared with respondents who say that this has significantly hindered or somewhat hindered their efforts (48%) and had no impact on their efforts (47%).

Respondents say that the top three contributors to clinical cost containment are clinical documentation improvement initiatives (57%), care standardization (49%), and efficient use of clinical labor (40%). 

As with operations/administrative cost containment activities, there is a correlation between clinical cost containment and value-based care.

For example, responses for care standardization are higher among respondents who say the transition from fee-for-service to value-based care has either significantly improved or somewhat improved their cost containment efforts (58%), compared with respondents who say that this has had no impact on their efforts (47%) and significantly hindered or somewhat hindered their efforts (39%).

However, Eckes points out that, while there is a positive correlation between value-based care and cost containment efforts such as care standardization, value-based care is not the only driver of activity in this area. "Before value-based care was ever in the discussion, many of us talked about the priority to standardize clinical processes and the efficiencies born from it."

Revenue 

Respondent expectations for top-line revenue growth over the next three years are bullish, with 63% saying that they expect either major growth (13%) or moderate growth (50%). Slightly more than one-third (35%) say they expect either minor growth (31%) or no growth (4%), and only 3% expect negative growth.

Interestingly, survey results for top-line revenue growth reveal a correlation with the ability to determine the true cost of providing care.

For example, responses for moderate to major growth are highest among respondents who say that they can determine the true cost of care for all or most care provided (76%), followed by respondents who say that they can determine the true cost of care for some care provided (60%); lagging are those who cannot determine the true cost of care for any care, with just 36% projecting moderate to major top-line growth. 

Furthermore, a significantly greater share of those unable to determine true cost for any care expect either no growth (11%) or negative growth (11%), for a combined 22%. That 22% non-growth outlook compares poorly to the 3% share among organizations that can determine the cost of all or most care, and the 5% share among those that can determine the cost of some care.

Revenue cycle

The majority of respondents (51%) indicate that revenue cycle activities have a high impact on their organization’s ability to achieve financial goals, and 39% say that this has a moderate impact. Only 10% say that revenue cycle activities have a low impact, and no respondents say that this has no impact.

According to Eckes, revenue cycle initiatives continue to produce significant contributions to the balance sheet, lessening some of the burden of continued cost cutting.

"We manage revenue cycle aggressively, and look to focus on revenue yield improvement. For example, over the last three years, we’ve had a three-phase revenue cycle improvement effort that has enhanced revenue yield annually to the bottom line and lessened the need for cost reduction."

Respondents indicate that improving clinical documentation (68%) is the revenue cycle activity expected to have the most positive financial impact—its response is in line with last year’s survey (70%), where it also was the top response. Minimizing denials (60%, up 13 points) and using IT to automate revenue cycle functions (39%, up six points) round out the top three responses.

Eckes points out that preservice collection efforts will be of growing importance going forward. "The share of payments coming from self-pay versus the insurance company is increasing. As the share of out-of-pocket payments increases, there will be the need to provide patients with creative payment solutions to ensure the timely collection of funds due."  

Savings from cost reduction programs

Forty-nine percent of respondents indicate that cost reduction efforts yielded year-over-year savings of 5% or more for their most recent fiscal year—this result is identical to last year’s survey (49%). At the upper end of the scale, 12% of respondents had cost reductions of 11% or more. Both results indicate that there is room for further savings from cost reduction programs.

Note that there is a correlation between the level of savings respondents say they receive from cost reduction programs and their organizations’ ability to determine the true cost of care.

Sixty-three percent of respondents who are able to determine the true cost of care for all or most of their care report year-over-year savings of 5% or more for their most recent fiscal year, while 44% of those who are able to determine this for some of their care indicate savings of 5% or more, and just 32% of those who are unable to determine true costs for any of their care are achieving such savings.

Fifty-seven percent of respondents expect average annual cost reductions of 5% or more over the next three years, up eight percentage points over last year’s survey. At the upper end of the range, 13% of respondents are expecting average annual cost reductions of 11% or more. Respondents remain optimistic about their ability to bend the cost curve on a healthcare system long cited for its inefficiency.

Survey results indicate that there is a correlation between the level of savings respondents say they expect to receive from cost reduction programs and their organizations’ ability to determine the true cost of care.

Sixty-six percent of respondents who are able to determine the true cost of care for all or most of their care project annual savings of 5% or more over the next three years, while 54% of those who are able to determine costs for some of their care indicate annual savings of 5% or more over the next three years, and just 42% of those who are unable to determine costs for any of their care are achieving such savings.

Operating margin 

Twenty-one percent of respondents estimate a negative operating margin for the most recent fiscal year, and 78% estimate a positive margin. These results are comparable to last year’s survey in which 17% estimated a negative operating margin and 78% estimated a positive margin. Only 1% of respondents report flat results for this year’s survey.

Interestingly, the share of respondents estimating a negative margin is slightly higher for those who are able to determine the true cost of care for all or most of their care (25%) than for those who are able to determine this for some of their care (21%), and those who are unable to determine the true cost for any of their care (16%).

However, the share of respondents estimating a positive margin of 6% or more is much higher for those who are able to determine the true cost of care for all or most of their care (31%) than for those who are able to determine this for some of their care (20%), and those who are unable to determine the true cost for any of their care (12%).

The outlook for the next three years shows some improvement, with only 7% of respondents saying that they expect to average an annual negative operating margin over the next three years, and 91% expect to average a positive margin during that same time period. These results are comparable to last year’s survey, in which 7% expected to average a negative operating margin and 87% projected positive annual margins over the next three years.

According to the survey results, margin performance is correlated with the ability to determine the true cost of providing care. For example, the share of respondents expecting to average a negative margin over the next three years is slightly higher for those who are unable to determine the true cost of care for any of their care (15%) than for those who are able to do this for all or most of their care (11%).

At the other end of the spectrum, the share of respondents projecting an annual margin of 6% or more over the next three years is higher for those who are able to determine the true cost of care for all or most of their care (29%) than those who are unable to determine the true cost for any of their care (15%).

Eckes mentions a key initiative that yielded insights as to where the organization stood regarding the difficult task of keeping costs and revenue in balance. 

"Wake Forest Baptist Medical Center has a formal cost management plan in place. And I don’t know if there’s any CFO of a large institution in this industry that hasn’t engaged one of the big firms to come in and help do that plan. And one of the core pieces is being able to benchmark against other organizations, determine whether we are doing well, and if we are doing well compared to the industry."