Healthcare Revenue Cycle Management, ICD-10, Claims Reimbursement, Medicare, Medicaid

Policy & Regulation News

How Can Hospitals Refocus Cost Reduction, Payment Tactics?

By Jacqueline DiChiara

- As hospitals consider various ways to strengthen their revenue cycle, they may be focusing on the wrong places while overlooking the right places. As the expansion of hospital acquisition and mergers continues with more vigor, healthcare costs increase, and ICD-10 looms nearer, the importance of intelligent financial streamlining is especially imperative. Trimming the revenue cycle fat is a multi-faceted, complicated process with many connecting gears. How can hospitals best refocus their cost reduction, reimbursement, and payment strategies? Are they utilizing improper techniques and, resultantly, falling financially behind?

hospitals cost reductions reimbursement

As a follow-up to his earlier conversation with about how accountable care organizations drive patient behavior, Bruce Hallowell, Managing Director at Navigant Healthcare, recently chatted again with Xtelligent Media about how hospitals should best approach cost reduction challenges. How are hospitals approaching cost reductions?

BH: When hospitals do cost reductions, they look at cost, not outcomes. This takes their bottom line away. There is a bad habit in healthcare of treating everybody like a Medicare patient, so Medicare pays on DRG and we don't get paid based on things like length of stay. There’s a huge effort to cut length of stay. When I'm cutting cost, I need to cut costs in the appropriate area.

Cost relationship to length of stay is not always a good measurement. It's cost per day as the measurement. It's that disconnect of not understanding that although everybody is equal from a patient care standpoint, not everybody is equal from a reimbursement standpoint. That is a fallacy in cost reduction. People think if I just collapse those costs together, I can actually raise my cost profile. What happens is they just get more readmissions.

READ MORE: Pew Urges CMS to Consider Physician-Focused Payment Models What is the best overall approach for hospitals to consider costs?

BH: You have to look at it from the holistic approach. What are the costs that are actually costing me something in my different payer levels? Is it a utilization or a variation? How do I get rid of variation and not worry about the number of days?

As we go through pay-per-performance, it's going to require hospitals to do things that they don't want to do. What we're trying to do is as we get into the new payment methodologies and bundles and take risks is move into what we call the next stage in understanding cost.

Everybody merged together and bought lots of hospitals. It's a duplication of leadership. We have systems with five hospitals within ten miles of each other. The issue is that they're not really a system, but a configuration of different hospitals. We never deal with the cost structure. The cost that we can affect has nothing to do with patient care. 

You can go to a system and find out they have ten people at ten different hospitals as the director of OR and they're not dealing with the cost, the consolidation, or that next level of integration. It’s a duplication of management, the command-to-control ratios.

Variation is caused by management and causes cost. If I have four different managers doing the same function, I'm going to get it four different ways. Consolidating that management layer to reduce overhead cost will help with the new payment methodologies. This will not make the bottom line any better, but it will force hospitals to become more efficient.

READ MORE: Targeting Healthcare Cost Cuts Slows Revenue Cycle Performance What changes are brewing because of new payment methodologies?

BH: If you have two underperforming units at two different hospitals that are five miles apart, if we moved them to one facility, they would be a high-performing function, but we don't want to make those tough decisions. The new payment methodologies will force the healthcare industry to make tough decisions, such as do I really need four OB units within ten miles of each other or do I need one? ACOs – basically capitation with no control – are starting to look at risk components, making sure we get continuing of care from beginning to end provides an idea of how cost is structured.

We went through a period of times where hospitals made more money on their investment income than on operations, and hospitals were slow to cut their costs when the market crashed, which caused a dip in overall cash days on cash on hand. They are now refocusing to cut costs and selectively invest in capital.

The problem existed before, but it was masked because of investment income for most facilities. I remember when regulatory change would happen every five or ten years and now it's a yearly event. The rate of change in healthcare is at a speed that management has to keep up. How do you anticipate ICD-10 threatening hospitals’ revenue and reimbursement situations?

READ MORE: Revenue Cycle Management, Upgrades Jump to Top Hospital Priority

BH: ICD-10 is going to have a bigger impact on hospitals from a revenue and cash standpoint than anything else that's coming right now. I have to get past that before I can deal with ACOs and bundled payments. ICD-10 is the biggest threat to any income. We’re changing the wheels on the car going 100 miles an hour. People who are not taking it seriously understand it from a technical standpoint and not a process standpoint. The threat is impending change that has a direct impact on reimbursement and that's where my cash and investment comes from, that's where I pay my employees.

The problem is people don't like to be tracked. Years ago, you put in centralized scheduling and centralized scheduling. What makes it difficult is I have to track my asset, such as an X-ray machine, I have to track the room, and I have to track the resource. Well, resources don't like to be tracked and that's where we get this funny little number.

I can tell you all the supplies and charges it took to do a colonoscopy. I can give you all the variation. Where I have trouble is dealing with the productive and unproductive time of the clinicians and physicians or saying how much time did you actually spend there? That's where people in healthcare are pushing back, saying I'm giving care, I shouldn't have to do that. Most places don't always want to divulge it because of bricks and mortar costs.

Things are marked up so high because we're offsetting programs that pay below cost. Medicaid is a program that doesn't cover the cost, so it shifts to somebody else. That's not a hard thing to track, but you need diligence.

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