Will the Revenue Ever Return? COVID-19 and the Rise of the Insurers; the Case for Operational and Cost Transformation
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As healthcare providers face the long-term revenue compression of COVID-19, they’re also navigating significant industry changes. Current challenges include horizontal competition from large insurers and digital disrupters, growing telehealth volumes, headwinds from price transparency, and growth in managed care programs, like Medicare Advantage. Without restored or growing volumes, how do health systems return to profitability? Health systems will need accurate financial data around service line and procedural profitability, which very few have. Allocations, estimates and averages of cost, and large pools of clinical “overhead” are inaccurate, and these methods have no credibility with physicians and administrators. Join Rob DeMichiei, Strategic Advisor for Health Catalyst and former Executive Vice President and Chief Financial Officer for UPMC, to learn more. What You’ll Learn: - How insurers look at their medical expenses, and their plans to reduce utilization and steer volumes away from traditional providers. - The implications of price transparency; why a rational pricing strategy is critical to success. - Using existing EHR data to measure and assess 100 percent of your clinical costs. - How improved costing enables service-line management and allows for improved clinical care delivery and insight into profitability. - How activity-based costing can help identify physician and clinical variation. - Implications of inaccurate RVU/RCC costing on contract negotiations, resource management, and productivity reporting. - Benefits and simplicity of activity-based (consumption) costing.
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Will the Revenue Ever Return? COVID-19 and the Rise of the Insurers; the Case for Operational and Cost Transformation
- 1. Will the Revenue Ever Return? COVID-19 and the Rise of the Insurers; the Case for Operational and Cost Transformation Robert A. DeMichiei – Strategic Advisor, Health Catalyst; Retired EVP and CFO, UPMC March 31, 2021
- 2. © Health Catalyst. Confidential and proprietary. “Balkanization” of Provider Revenue PROVIDER REVENUE Insurers Vertical integration Med Adv Economy Payer mix Plan design COVID-19 Volumes Telehealth Commercial Price transparency OON billing CMS/DOJ VBC/bundles M&A oversight Variable Costs Inpatient Outpatient Physician Volume Mix Rate Site/ scheme PROVIDER EXPENSES Fixed Costs ~30% ~70% Permanent impact on revenue and growth?
- 3. © Health Catalyst. Confidential and proprietary. Say “Hello” to the Competition WELL-FUNDED – NARROWLY FOCUSED – CONSUMER CENTRIC
- 4. © Health Catalyst. Confidential and proprietary. The New Competitive Landscape for Healthcare Health systems dwarfed by other (quickly growing) industry giants Source: “National Hospital Flash Report,” Kaufman Hall, January 2020. Web. Publicly-available financial statements and investor reports: Gist Healthcare analysis.
- 5. © Health Catalyst. Confidential and proprietary. All Major Insurers Are Now Vertically Integrated OptumCare UHC OptumRx BriovaRx Minute Clinic Health Hub Aetna CVS Caremark CVS Specialty Cigna Collective Care Cigna Express Scripts Accredo CareMore Health; Aspire Health Anthem IngenioRx CVS Specialty Partners in Primary Care; Conviva Care Center; Kindred at Home Humana Humana Pharmacy Solutions Humana Pharmacy Provider services Insurer PBM Specialty pharmacy BlueCross BlueShield Prime Therapeutics2 AllianceRx2 Various Blues physician practices Walmart? Capital Rx2 Walmart Specialty Pharmacy Walmart Health Source: Fein, “Insurers + PBMs + Specialty Pharmacies + Providers: Will Vertical Consolidation Disrupt Drug Channels in 2020?” Drug Channels, December 2020.
- 6. © Health Catalyst. Confidential and proprietary. The View of the Insurer…Massive Opportunity Inpatient 31% Outpatient and ED Physician Diagnostics 8% Pharmacy 7% Ancillary and other • Reallocate/Divert • Prevent/Reduce vs. React • Network (value) – Rates – Utilization – Outcomes • Plan Design • Insurance vs. Outsource • Role of Physician “Core” hospital Services = 62% Medicare Advantage: Representative member medical spend Tactics
- 7. © Health Catalyst. Confidential and proprietary. “Why is the price of the x-ray unknowable?” – Judge Davide Tatel – DC Circuit Court of Appeals (responding to AHA lawyers arguing against price transparency legislation) Price Transparency • Delay or address • Bundled vs. ala carte • Premium (quality/reputation/scarcity) (á) vs. Commodity (â) • Irrational price à irrational costs (and vice versa) Source: Hospitals lift curtain on prices, revealing giant swings in pricing by procedure. Healthcare Dive. Accessed March 18, 2021. https://www.healthcaredive.com/news/hospitals-price-transparency-spotty-compliance-swings- price/596183/
- 8. © Health Catalyst. Confidential and proprietary. Fee-for-Service “Circle of Doom” • Bundled pricing • “Golden Goose” • New technology • > Inflation • Focus on direct vs. indirect costs • Primitive tactics ‒ Volume/rate ‒ ATB cuts Revenue - Expense Profit Great strategy…. …until it’s not! Revenue - Expense (Loss)
- 9. © Health Catalyst. Confidential and proprietary. Payment system reform will require providers to bear greater population-based financial risk Changing Environment Transition From Fee-For-Service Degree of Population Risk Transferred to Provider by Payment System High Low Capitation Providers share savings from better care coordination and disease management. Shared Savings Shared savings from better care coordination and disease management. Reform: §ACOs Episodic Payments Payment based on delivery of services within a given timeframe. Reform: §Bundled Payment (ACE Demonstration) Pay-for- Performance Payment tied to objective measures of performance. Reform: §Value-Based Purchasing/HAC §Readmit Policy Pay for Coordination Additional per capita payment based on ability to manage care. Fee-for-Service Paid for each unit of service without constraint on spending.
- 10. © Health Catalyst. Confidential and proprietary. Poll Question When do you predict a return to normal (pre-pandemic) hospital volumes/revenues? • 2021 – 3% • 2022 – 24% • After 2023 – 14% • Permanently altered/changed – 59%
- 11. © Health Catalyst. Confidential and proprietary. Acceptable Process and Cost Variation? 6 SIGMA CLINICAL PATHWAYS
- 12. © Health Catalyst. Confidential and proprietary. Evolution of Cost Systems “Fee-for-Service” payment system incentivized doctors and hospitals to order more tests and do more procedures. Can drive up costs! Obsolete cost management methods such as Relative Value Units (RVUs) or Ratio of Cost to Charges (RCC). Can’t tackle new challenges! A methodology is needed that accurately measures activities, resources, and cost objects (patients). Revenues and expenses can then be determined at a patient level according to the patient’s activities across the continuum of care. Activity-based costing (ABC) is the best approach.
- 13. © Health Catalyst. Confidential and proprietary. We already do cost accounting/measure productivity. You probably don’t. Activity-based costing is too complex to implement/maintain. It’s actually not. We have great financial analysis and operations support. You can do much better. Finance Mythology – Costing
- 14. © Health Catalyst. Confidential and proprietary. Why does it matter? How Is Activity-Based Costing Different? Healthcare Today • Incorrect or no linking of activities and costs • Large pools of indirect cost/”overhead” allocated back to procedures and physicians • Little or no accountability ECON 101 Doesn’t Agree!! • “Nothing is free.” • “Cost has a major impact on consumption.”
- 15. © Health Catalyst. Confidential and proprietary. Activity-based costing connects the actions and decisions of clinicians…relating to the consumption of finite resources…to the actual cost of each action and decision. Actions have (cost) consequences.
- 16. © Health Catalyst. Confidential and proprietary. Why CORUS: Activity-Based Costing? • Systemic | Repeatable | Timely • Identifies variation • Physicians recognize cost profile • Consumption vs. allocation • Anchored vs. fragmented – General ledger – Clinical systems/EHR – Total cost (Nursing, OR’s, Clinical Compensation, etc.)
- 17. Clinical data Financial data Activity-Based Costing: A Collision of Financial and Clinical Data Activity-Based Costing Analytics
- 18. © Health Catalyst. Confidential and proprietary. Example: Traditional View of Reporting Hospitals Hospital 1 Hospital 2 Hospital 3 Total Revenue (Net of Bad Debt) $1,400 $300 $350 $2,050 Operating Expenses Salaries, Supplies & Purchase Services 750 150 200 1,100 Physician Investment 250 40 60 350 Admin & Other Expenses 110 40 40 190 Total Operating Expenses 1,110 230 300 1,640 Operating Income before Centrally Managed Expenses $290 $70 $50 $410 Centrally Managed Expenses 380 Operating Income $30 Hospital Component Natural Classification of Expenses *Sample data shown for illustrative purposes only
- 19. © Health Catalyst. Confidential and proprietary. Illustrative Hospital P&L Statement Hospital 1 Hospital 2 Hospital 3 Total Revenue (Volume + Rate) $ $ $ $ Direct/Service Line Costs • Supplies • Pharmacy • Blood $ $ $ $ Gross Margin $ $ $ $ Indirect/Service Center Costs • Surgical Services • Nursing • Imaging • Labs • Other services $ $ $ $ Total Controllable Expense/ Hospital Controllable Margin $ $ $ $ Admin Costs • Supporting • General $ $ $ $ Operating Income $ $ $ $ ~30% ~70%
- 20. © Health Catalyst. Confidential and proprietary. Hospital Services Patient Pathway 1 Interventional & Diagnostic 1.1 Interventional ….. Cardiology 1.2 Interventional ….. Radiology 1.3 Endoscopy 1.4 Non-Invasive ….. Cardiology 1.5 Imaging 1.6 Laboratory 1.7 Medical …..Oncology 1.8 Radiation ….. ….. Oncology 2 Surgical Services 2.1 Operating ….. ….. Room 2.2 Ambulatory ….. ….. Surgery 2.3 Anesthesia 2.4 Blood 2.5 Perfusion 2.6 PACU 2.7 Transplant 3 Nursing 3.1 Med/Surg 3.2 ICU/CCU/NICU 3.3 Rehab/Psych/ ….. SNF 3.4 Care ….. ….. ….. Management 3.5 Nurse Admin 3.6 Central Supply 4 Other Clinical Services 4.1 Pharmacy 4.2 Retail Pharmacy 4.3 Emergency Room 4.4 PT/OT/Speech ….. ….. Therapy 4.5 Respiratory & ….. ….. Pulmonary Services 4.6 Outpatient Clinic 4.7 Psychiatry 4.8 Med Record/Patient ….. Access 4.9 Clinical Admin 4.10 Ancillary 4.11 Dialysis 4.12 IV Teams 5 Facility Services 5.1 Dietary 5.2 Laundry 5.3 Environmental Services 5.4 Clinical Engineering 5.5 Utilities and Maintenance 5.6 Parking 5.7 Property/ Security/Construction 5.8 ICT 6 Administration & General Services 6.1 Finance 6.2 Human Resources 6.3 Physician Services 6.4 Grants 6.5 Administration 7 Centrally Managed Expenses 7.1 ESS 7.2 Depreciation 7.3 Physician …..Support 7.4 Centrally Managed Benefits 7.5 Insurance Emergency Room Primary Care Physician 1 Interventional & Diagnostic 1.1 to 1.8 3 Nursing 3.1 to 3.6 2 Surgical Services 2.1 to 2.7 4 Other Clinical Services 4.1 to 4.12 Millrock Hospital 5 Facility Services to 5.1 5.8 6 Administration to 6.1 6.5 6 Centrally Managed Expenses to 6.1 6.5
- 21. © Health Catalyst. Confidential and proprietary. H V I O R T H O P A E D I C S U R G E R Y N E U R O L O G I C A L I N S T I T U T E W O M E N ' S H E A L T H Patient Revenue $227 $178 $140 $134 Direct Expense2 $57 $46 $34 $10 Service Expense3 $73 $57 $39 $61 Imaging 2 4 4 4 Laboratory 3 1 2 6 Other Interventional/Diagnostic 12 0 3 1 Surgical Services 13 25 9 7 Med Surg 15 12 7 21 ICU CCU NICU 10 2 5 10 Rehab/Psych/SNF 0 0 0 1 Other Nursing 2 1 1 1 Other Clinical Services 14 9 8 10 Dietary/Laundry 2 2 1 2 Subtotal Variable Expense $130 $103 $74 $71 Supporting Expense4 $33 $26 $17 $22 Hospital Service Line Margin $64 $49 $49 $41 Links Service Line with Service Center Example: Service Line Reporting *Sample data shown for illustrative purposes only Patient Service Line Components Service Center Costs Variable Costing at Service Line Basis Full Costing at Service Line Basis ($ in millions)
- 22. © Health Catalyst. Confidential and proprietary. Physician Variation *Sample data shown for illustrative purposes only Supplies Expense for DRGs 480-482 - Surgeons with at least 5 cases Average per Case Phys A Phys B Phys C Phys D Phys E Implants $2,410 $2,038 $3,302 $1,792 $2,808 Blades, Power 250 179 238 184 165 Packs, Interventional 114 88 96 19 118 Medical & Surgical 88 59 59 51 42 Blades, Knives 318 0 - 316 - Instruments, Surgical 0 - 195 - 201 Other 229 756 437 228 - $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 Phys A Phys B Phys C Phys D Phys E Phys F Phys A Phys G Phys H
- 23. © Health Catalyst. Confidential and proprietary. Lumbar Spinal Fusion (n=852) Full Consumption Costing and Clinical Variation 20% Surgical Services Avg. cost per procedure: $3,530 $8,270 66% 161% 67% 184% 14% Nursing Avg. cost per procedure: $2,520 4% Interventional & Diagnostics Avg. cost per procedure: $710 Supplies, Blood, and Drugs Average cost per procedure: $9950 45% 162% 53% 203% 35% 333% 8% All Other Avg. cost per procedure: $1,510 67% 155% Consumption Driver $9,950 45% 162% = 55% 155% $18,220 variation variation variation variation variation variation Direct (54%) Indirect (46%) variation variation Surgical Services: OR Case Minutes – Room-in to Room-out time, Staff Time Nursing: ADT Minutes – Time patient was in bed (NOT # of room charges) Interventional Diagnostics: Lab count, Imaging time (MRI), Imaging counts (X-ray) All others: varies by service
- 24. © Health Catalyst. Confidential and proprietary. Margin Improvement – Tactical • Integration – aggressive/“last mile” • Centralization – job mapping/“shadow” organizations • Targets/ATB – still works; diminishing returns • Executive leadership consolidation – salary/# of direct reports • Purchased services – vertical • Physician referral leakage • Patient access • Revenue cycle improvements
- 25. © Health Catalyst. Confidential and proprietary. Margin Improvement Enabled with Activity-Based Costing • Proactive Pricing Strategy • Service Line Management – Vendor consolidation/supply cost “activation” – “credit” to physicians – New integration opportunities – Closure/consolidation à strategic growth – Horizontal cost reduction • Clinical Practice Variation • Risk-Based Reimbursement – Bundles/capitation – Health Plan • Physician/APP Integration • Optimization/Productivity – “Cost per” targets – OR volume/sites/utilization – Exam room volume/sites/utilization – Facility costs/utilization
- 26. © Health Catalyst. Confidential and proprietary. Poll Question How effective are your current cost accounting/productivity and decision-support analytics? (from the perspective of Operations and Physicians) • Highly Effective – 12% • Average – 51% • Below Average – 33% • No One Uses/Care – 4%
- 27. © Health Catalyst. Confidential and proprietary. What Is Cost Productivity?
- 28. © Health Catalyst. Confidential and proprietary. Health Services Division FRR Package Cost Productivity Metrics Are we managing our cost with volume across services and by region? HSD Total Cost Productivity Are we managing our cost with volume? Physician (PSD) Operating Results What is our core physician investment? Regional Physician Operating Results What is our regional physician investment? Cost Per Expense Volume Cost Per Med Surg / ICU Productivity 5% ▲ 2% ▲ -3% ▼ 4% ▲ Surgical Services Cost Productivity 1% ▲ -1% ▼ -2% ▼ -3% ▼ Drug Cost Productivity 0% ⚊ -1% ▼ -2% ▼ 19% ▲ Med Surg Supply Cost Productivity -3% ▼ -3% ▼ 0% ⚊ 2% ▲ Physician Clinical Cost Productivity -1% ▼ 0% ⚊ 0% ⚊ 1% ▲ vs Prior Year Variance vs Budget xxxxxx xxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx ILLUSTRATIVE EXAMPLE ILLUSTRATIVE EXAMPLE ILLUSTRATIVE EXAMPLE ILLUSTRATIVE EXAMPLE
- 29. © Health Catalyst. Confidential and proprietary. How to Win in Today’s Environment 2 3 5 Physician engagement is key to improving performance. Credible patient-level cost and quality data is necessary to gain physician support. Activity-based costing is a prerequisite for effective cost productivity management and service line development. Cost productivity information is essential to improve service cost performance in an era of shifting service volumes and locations. Service line management is critical toward improving cost and quality of key patient services. 6 1 4 Developing a collaborative leadership team is key to overcoming traditional structures and paradigms.
- 30. © Health Catalyst. Confidential and proprietary. CORUS Value Proposition Better Analytics • Activity-Based Costing > RVU Costing (accuracy, physician buy-in, ability to track/identify physician variation) • Activity/Consumption Costing of 100% of clinical costs vs. broad allocations of cost using RVUs Ease of Implementation/ Maintenance • Implementation: CORUS implemented/live in under 90 days, with suggested 3 months of user acceptance testing • Upkeep/Maintenance: Leverages existing EMRs, clinical systems, and general ledger; minimal maintenance • Visualization: Easy interfaces to Tableau, QlikView, etc. • Integration: Integrates with all platforms (Oracle/PeopleSoft, Lawson, etc.); active reference sites on all platforms Cost/Value/ROI • $ Savings vs. current contract • ROI delivered from new/enhanced capabilities: Service Line reporting, Physician Variation, Organizational adoption, Cost Productivity