Five Trends Impacting Hospitals’ Business Processes and Financial Health

From the October 2005 Issue

Procurement and supply chain execs can boost bottom lines, compliance and future business growth with the creative use of IT systems.

By Gary Johnson

Gary Johnson is vice president of marketing and marketing services at MedAssets, headquartered in Alpharetta, Ga. Contact him at gjohnson@medassets.com.

As soon as the dust settles from one storm in healthcare, another wind begins to stir. Now, financial transparency is the name of the game. Listen closely at healthcare education conferences; take a glance in industry publications; talk to hospital board members. It’s impossible to miss the focus on larger market trends that have, or will have, a direct impact on senior executives’ daily responsibilities and the financial health of every healthcare organization. Most of these trends shine a light on data, processes and relationships that will increase hospitals’ ability to make good financial decisions like businesses in any other industry.

Implementation of Sarbanes-Oxley: Internal Controls and Conflicts of Interest Policies
The Sarbanes-Oxley Act of 2002 (SOX) was passed partially in response to corporate scandals such as Enron and WorldCom. While adoption of these standards is not required for non-profit hospitals at this time, a large majority of hospitals are adhering to certain SOX policies, especially those related to internal controls and conflicts of interest.

Many hospital board members are executives from non-healthcare industries, and they see the value in creating more transparent and controlled processes. Lenders also view facilities implementing SOX in a favorable light, because it displays a commitment to proactive process improvement and pursuit of a higher quality of management standard. Hospitals are focusing on internal controls in areas where contractual agreements with outside parties impact financial statements. Supply chain function will be one of the first areas of focus, considering supplies expense is the second largest expense in any typical health system.

The supply chain has a large number of supply and service agreements, many of which are in paper format and archived in the staff’s file drawers. A documented process needs to be established for how these agreements are formed, monitored and enforced with centralized control and transparency. A hospital needs processes in place to ensure that staff complies with purchasing contracted items whenever possible and that the contracted price for items is the actual price that appears on the invoice. Technology is available to automate this cumbersome and all-consuming task. IT solutions, such as e-catalogs housing all supply and service agreements with interfaces to the procurement process can alleviate human error and provide data in real time to increase transparency.

This need for transparency follows the patient-identifiable supply cost all the way to the patient bill where there must be a documented method for markups as part of the patient charge process. Accurate data related to the cost and markup of patient-identifiable supplies is essential, because these transactions impact expense and revenue on financial statements.

Furthermore, the industry is calling for increased transparency into the selection and purchasing of medical devices. SOX has strongly influenced this trend by enabling administration to put conflicts-of-interest policies and programs in place. Strategies are needed to eliminate any conflicts of interest by bringing the purchasing/negotiating decisions for high cost implants under the process and authority of the materials manager to ensure the financial impact on the hospital is considered.

While these purchasing decisions must not exclude the physician who will use the product, purchases should not be based exclusively on preference. Herein lies a good opportunity to implement a value analysis process with objective decision criteria and full transparency of the expense and reimbursement impact of a supply item.

Hospital Pricing Made Available for Public Viewing
More than a dozen states have adop-ted, or are considering adopting, legislation that will make procedure pricing available to the public. Preparing for this possibility now will save time when a state decides that hospitals should and will publish pricing. It will also give hospi-tals a chance to ensure that the information they publish is defensible and makes sense. One story in a local newspaper about an acetaminophen pill that costs $15 can tarnish a hospital’s image in the community for years.

Infrequent attention to pricing and a focus on cost-plus markups to establish high gross prices that will be discounted for managed care rates has led to unintended errors in most hospitals’ chargemasters. Unscrubbed, gross prices listed on a Web site for the world to see are a formula for a PR disaster.

States that currently and publicly mandate listing prices do so in various forms. Listings range from the entire chargemaster to specific DRG cost information available upon request. A hospital must prepare for this public scrutiny by completing an audit of pricing strategies, supplies markups, and benchmarking to other similar facilities’ pricing for services and supplies. The healthcare organization must also recognize the self-pay category as a specific payer group. Gross pricing applied to self-pay is ineffective in the new market conditions (as the next section makes clear). Investigating technology that can clean data and prepare an organization for publishing pricing on an ongoing basis will not only prevent a negative public event, but also provide a big opportunity for revenue enhancement.

Increasing Number of High Deductible Insurance Products and Healthcare Saving Accounts
As employers face the rising costs of healthcare, they are offering alternative benefit options such as high deductible insurance products and healthcare savings accounts (HSAs) that may significantly cut total costs or stave off a big increase. High deductible products may be a first option for small- to mid-size employers with a basically young and healthy workforce, with HSAs as a complimentary offering. The idea is that HSA funds will pay the bills until the high deductible is met.

According to a recent survey conducted for the American Hospital Association and Federation of Hospitals, 72 percent of employers say they are likely to offer HSAs to their employees in 2006. This is up 29 percent from 2005. New tasks associated with this phenomenon are similar to that of the potential published pricing legislation. More patients being admitted to a hospital will essentially be self-pay patients responsible for direct payment of their bill. These patients will likely become, more so than in the current environment, savvy healthcare consumers who shop around for services based on price and quality, because it’s their money and their decision.

This creates a scenario where a hospital’s prices and markups for services and supplies will need to make sense under public scrutiny. With the increased number of self-pay patients comes the possibility of increased bad debt, unless billing and payment processes are customized for this growing population. For example, a healthcare organization may need to establish a way to obtain funds from a bank that is the patient’s HSA provider. In addition, a detailed bill will need to be presented before service is provided—and this raises the issue of real-time, accurate public pricing information being made available. Back office processes need to be established to handle the influx of patients who require an evaluation of their deductible at the time of eligibility determination.

Another caveat is determining what charge to apply to this type of patient. Will it be the gross charge applied to the self-pay population, the discounted rate given to those with coverage or some mix of the two depending on deductible status? All of these questions point to an industry that is now taking one more step toward true consumer managed healthcare.

Increased Focus on Denials Management
The statistics are astounding. Error rates on claims range from 8 percent to 30 percent of the total number filed, with most of these occurrences resulting from coding errors. In addition, 25 percent to 40 percent of all claims are delayed via editing or are denied, and 50 percent of claims are never refiled. However, 90 percent of denials are preventable, and 67 percent of denied claims are recoverable.

Denials come in several forms: zero payments, partial payments, delayed payments, and inaccurate payments. Reducing denials and reconciling past denials will uncover and recover a substantial amount of new revenue without treating even one more patient.

Addressing denied claims and the source of the error will not only provide more cash from existing operations, but it will force a facility to cleanse the data and bring more transparency to the processes that lead to incorrect claims.

Approximately 79 percent of errors originate from the chargemaster, while many other claims may be denied because of incorrect compilation of charges. Capturing the correct charges for each procedure and finding errors before the bill is submitted to the payer can reduce the amount of denied claims and the effort needed to identify what went wrong.

Less than 10 percent of hospitals have a denials management system, a surprising fact considering the substantial revenue to be found by giving this area some attention. One reason may be the labor-intensive process of addressing countless claims in various stages of denial. Using information technology in conjunction with a new process to address denials may make the initiative seem less overwhelming, help find new cash on a retrospective basis and maximize cash on a prospective basis by avoiding denials.

A New Way to Measure Supplies Expense
For years, hospitals have evaluated their supplies expense with methods that give an inaccurate portrait of what is really happening. Evaluating supplies expense as a percentage of net patient revenue, for example, completely disregards the hospital patient population, as well as what procedures are performed at the facility. Because each hospital is unique, this method does not provide a meaningful comparison for action.

Measurements do not always compare “apples to apples” even when measurements taken emanate from hospitals in the same healthcare system. Hospitals are not created equal, and some methods include limited ways to adjust for these discrepancies. The Medicare Case Mix Index (CMI) has been used to level the playing field and has become an accepted method across the industry. However, CMI was developed as a reimbursement mechanism, and not as a predictor of supply utilization. Two procedures may have the same CMI but consume very different types of supplies and therefore supplies expense. For example, DRG 121 Circulatory Disorders (CMI 1.62) and DRG 520 Cervical Fusion (CMI 1.63) have almost identical case weights, but their average supply costs are $942 and $4,680 respectively.

Another accepted method is measuring supply costs per adjusted patient day. This too can be misleading, because it assumes length of stay is the same in all hospitals and actually rewards those hospitals with longer stays.

Hospitals must be able to benchmark with facilities that perform the same types and numbers of procedures. Incorporating a measurement that looks at actual supply and pharmacy costs for all inpatient DRGs for similar facilities is ideal. By knowing this information, a healthcare organization can feel confident that it is comparing apples to apples and can accurately calculate a target for supply expenditures in key service lines.

Facilities that once thought they were performing well in the supply cost arena may be surprised to learn they are not, and vice versa. In fact, through use of information technology, a means exists for hospitals to focus on those key services lines that consume a bulk of the supply costs—especially big ticket implants—and use the new supply expense metric to incent and reward the hospital team based on a more impactful method of measuring performance.

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