Cost Containment Strategies for Hospitals and Health Systems

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1 Cost Containment Strategies for Hospitals and Health Systems Healthcare reforms and the consequent strain on hospital funds have created a growing cost containment problem for hospitals and health systems throughout the United States. The healthcare industry now revolves around value-based business models, and hospitals simply cannot expect consumers to accept anything less than the highest quality of care at the most affordable fees. In order to respond to this influx of value-driven patients and rising costs, hospitals have little choice but to devise modern cost containment plans, or risk fading into history. Fortunately, detailed cost containment strategies can help healthcare facilities reduce costs without sacrificing quality of care. By combining new technology with more cost-effective business practices, healthcare CEOs and CFOs can optimize the revenue cycle and keep the healthcare organization financially strong. This report will explore the major financial challenges faced by hospitals and health systems due to recent trends in the healthcare industry. It will also discuss the major cost containment strategies that can help hospitals accomplish their cost reduction goals. I. Revenue Cycle Transformation Critical for Hospitals and Health Systems The revenue cycle is the lifeblood of health systems and/or individual hospitals. From initial patient registration to final billing, the entire process for collecting payments can make or break overall cost management. That s why the key to containing healthcare costs is to transform the way patient service revenue is collected. Hospitals must focus on transforming their outdated, inefficient revenue cycles into advanced, well-oiled revenue powerhouses. By optimizing and accelerating collection in every aspect, hospitals can maximize revenue capture, strengthen the organization s overall health, and continue serving patients into the future. II. Current Trending Recent reports on the healthcare industry indicate that many hospitals are experiencing similar financial challenges. Operational costs have risen due to constrained revenue cycles, and the problem isn t being solved. The following four key trends confirm these conclusions. 1. No Improvements in A/R Performance Accounts receivable (A/R) performance (the average number of days it takes to collect payment) impacts a hospital s ability to remain financially strong. Despite A/R s significance, hospitals have yet to significantly improve the amount of time it takes to collect. A/R performance has held relatively steady from 2006 to 2013, and even leaned toward decline at times¹.

2 Takeaway: Because inefficient payment collection is a key performance indicator for the revenue cycle, lack of improvement in A/R performance indicates inadequate effort by hospitals to improve revenue collection processes. 2. Revenue Cycle Expenses Growing Across the Board While A/R performance has remained stagnant, the overall cost to collect patient service revenue has increased across all performance quartiles. From 2011 to 2013, the full cost to collect payments increased from 1.9% to 2.6% for hospitals with the highest-performing revenue cycles, 2.3% to 3% for the median quartile, and 2.8% to 4.2% for the low-performance quartile.¹ Takeaway: Hospitals can work toward containing overall costs by preventing continued increases in revenue cycle costs. 3. Revenue Cycle Staffing Distribution Heavy on Back Office The recent increase in revenue cycle costs correlates with inefficient staffing distribution in hospitals. Because revenue cycle processes blend together and impact one another, inefficiencies early in the cycle can negatively impact the remaining revenue collection processes. The earlier an error occurs, the more processes it affects and the more expensive revenue recovery grows. This is clearly a problem for today s hospitals. In 2013, the average number of FTEs for the initial Registration step in the revenue cycle was high at 41. Staffing for mid-cycle processes, however, paled in comparison. The majority of mid-cycle revenue functions, including front-end and back-end financial counseling, billing, and cash posting, each had an average of 15 or less FTEs.¹ Takeaway: These findings indicate broad support for the initial revenue cycle processes, but minimal support for the mid-cycle and final steps of payment collection. 4. Hospitals Experience Billing Delays Concurrent with unbalanced staffing distribution trends, hospitals are experiencing significant delays in the final revenue cycle processes, especially in billing. The number of hospital patients who are discharged but not final billed (DNFB) serves as a key indicator of revenue cycle inefficiencies. From 2011 to 2013, the average number of days it took hospitals to collect revenue from DNFB patients increased across all performance quartiles, with the largest increase in the median quartile from 7.2 to 8.0 days.¹

3 Extended delays in billing led to tremendous revenue cycle delays. In 2013, the average dollar amount of DNFB activity totaled $18 million for hospitals in the high-performance quartile, and $42 million for hospitals in the low-performance quartile.¹ The convergence of these trends has already placed extensive pressure on hospitals and health systems to make critical funding decisions, but the problem of rising costs will not be solved until major operational challenges are overcome. III. Most Challenging Operational Issues Transforming revenue cycle management is certainly a challenge. Many hospitals not only have to utilize more advanced health technology systems, they also have to implement new operational policies, which has been easier said than done. According to a report released in early February 2014 by Becker's Hospital Review, Labor costs and staffing consistently rank as the leading operational obstacles to implementing adequate cost containment in the healthcare industry. Layoffs and attrition have been utilized to cut costs, but staffing remains the key operational issue.² Additionally, the Review found that 54.2% of hospital operating revenue in fiscal year 2012 went toward personnel expenses. This enormous percentage was attributed largely to increased labor costs caused by physician practice acquisition and health IT.² By addressing these major operational challenges head on, hospitals can start containing costs more effectively. There are two key pathways hospitals can take to do that. [Side Bar: What is Revenue Cycle Management 3 Distinct Phases] Revenue cycle management (RCM) comprises the full range of administrative and clinical processes involved in patient service revenue collection. The cycle has three distinct phases: 1. Patient Access: Scheduling Pre-registration Insurance Verification Registration Financial Counseling 2. Mid-Cycle: Case Management Utilization Review Coding Medical Transcription

4 3. Business Office: Billing Collections Denials Management Financial Counseling IV. Two Key Pathways Hospitals and health systems can take two key pathways toward sufficient cost reduction: A) Cost Containment and B) Business Restructuring. Many organizations are already heading down Pathway A, but because the problem of rising costs is so intense, some organizations should consider taking Pathway B as well. A. Cost Containment The first pathway, basic cost containment, requires an analytical, detailed approach to reducing healthcare costs by improving operations, and identifying and eliminating unnecessary expenses. Because staffing distribution in the revenue cycle is the key factor in rising costs, healthcare organizations need to carefully examine their staffing methods and ensure that all processes in the cycle receive balanced attention. One of the leading strategies for reducing costs through staffing changes is devoting more resources to reworking insurance claims prior to the initial claim submission. From 2011 to 2013, the percentage of office resources devoted to rework increased across all percentiles. This led to an average increase of 5 A/R days and an average decrease of 54% in denial writeoffs.³ Focusing on rework, however, offers a variable return. Healthcare organizations that implemented this strategy saw an average increase of 24% in cost to collect³. Not all did though. In 2012,...One health system reallocated HR functions, resulting in FTE savings of $6 million. The system achieved such savings by reducing the duplication of HR services and reducing excess capacity. A large portion of the savings resulted from the health system s decision to relocate several HR functions to regional or system-level offices. ⁴ In order to ensure reduced costs while optimizing staffing methods, hospitals should set clear goals for cost containment and streamline overhead functions. B. Business Restructuring Pathway A has been adopted by many hospitals and health systems looking to reduce costs in their existing business models, but basic cost containment methods often don t add up to

5 enough money saved. In addition to changing business operations, healthcare organizations should also consider taking Pathway B -- reshaping the business as a whole to revolutionize the revenue cycle and increase value of service. Hospitals and health systems are wasting funds on high labor costs, and operations are often strained by growth. Many health systems that practice physician acquisition, for example, have considerably outgrown their ability to efficiently manage operations among all care facilities, leading to wasted funds. Restructuring can solve this and other fundamental business problems. Two Major Restructuring Options: Outsourcing revenue cycle functions Switching to a shared services model Basic Outsourcing By outsourcing revenue cycle functions to a revenue cycle management provider, hospitals can alleviate the burden of payment collection and eliminate a large portion of labor costs. Although many organizations have already outsourced some functions, more can be done. The Collections process was the most outsourced revenue cycle function in 2013, with longterm collections being outsourced by 84% of hospitals, and early-out collections being outsourced by 67%. Other revenue cycle functions are outsourced infrequently. Less than 10% of hospitals outsourced billing and payer contracting in 2013.¹ Outsourcing the complete revenue cycle process allows hospitals to take even further advantage of the cost savings benefit. Shared Services Once seen as impractical, shared services are now a leading strategy for reducing costs in health systems. A shared services business model groups individual hospitals together under a single service organization, which performs a wide range of business functions for the entire group. Health systems that adopt a shared services model have the opportunity to increase purchasing power, improve operational efficiency across the entire system, and even provide higher quality of service to patients. [Side Bar: Top Concern for CFOs] The transition to ICD-10 is predicted to cost healthcare organizations more than $1.6 billion total. According to Becker s Hospital Review, it s the primary revenue cycle issue for CFOS in 2014.² Health systems that transition with help from a shared services association will save significantly on expenses and more easily mitigate HIPAA compliance risks.

6 V. Key Considerations for Future Cost Transformation Strategies Current healthcare market conditions are forcing hospitals to transform the ways costs are managed and to reevaluate their business models. Organizations that move swiftly enough to reduce and contain costs can survive. Those who don t may not. Hospitals that are determined to maximize resources and continue delivering quality care to more patients have two key pathways they can take. Pathway A, basic cost containment, may not be enough, so it s time for organizations to seriously consider moving along toward Pathway B, business restructuring. Restructuring to outsource revenue cycle functions or to adopt a shared services model is one of the leading ways to maximize funds and improve revenue collection. Hospitals and health systems should seriously consider this strategy to ensure cost transformation that lasts well into the new era of healthcare.

7 Sources: 1. Sarah Gabriel, Findings from the 2013 Revenue Cycle Benchmarking Survey. The Advisory Board Company, January 23, Bob Herman, The State of Healthcare Finance: 9 Major Survey Findings From Hospital CFOs. Becker s Hospital Review, February 6, Accessed on February 26, 2014 at 9-major-survey-findings-from-hospital-cfos.html 3. Heather Punke, Outsourcing is Exploding in Healthcare Will the Trend Last? Becker s Hospital Review, October 4, Accessed on February 26, 2014 at 4. A Guide to Strategic Cost Transformation in Hospitals and Health Systems. Health Research & Educational Trust and Kaufman, Hall & Associates, Inc., Chicago: March Accessed on February 26, 2014 at