To evaluate Managed Care contract performance, hospitals should establish a global KPI and focus their efforts on five metrics driving hospital revenue erosion.
If you follow politics, you are well aware that there is an ongoing debate between nationalism (primarily concerned with what goes on within a country’s borders) and globalism (trying to optimize outcomes for all nations). I will not wade into this debate, but it got me thinking about healthcare, more specifically, how hospitals measure contract performance.
I would argue that in a hospital, a global perspective is vital for success. But whenever I speak with colleagues in hospitals, they are quick to acknowledge and lament the many silos that exist in their organizations. Patient intake, utilization review (UR), compliance, documentation improvement, coding, billing, and payer contracting all exist on their own, and worse, have metrics for success that may not actually align with the success of the organization.
Nowhere is this more self-evident than Medicare Advantage (MA). When I ask UR leaders what their greatest challenge is today, they universally talk about their MA plans. CFOs and Managed Care leadership try to manage these relationships, usually with minimal or fleeting success. “We are getting killed by MA” is a common refrain. Each department implements its own action plan, works hard, and is often able to achieve its goals. But at the end of the day, the bottom line rarely moves (and sometimes it actually gets worse.)
Disconnected KPIs Are No Longer Effective in Evaluating Hospital Performance
A main driver of this frustration is the simple fact that only a coordinated, interdepartmental effort towards a common Key Performance Indicator (KPI) can result in success. This KPI is not denial rate, Case Mix Index (CMI), Account Receivables (AR) aging or write-offs. The “unifying” KPI should be “contract yield,” or cash received relative to charges. (Charges as a proxy for cost of the care delivered.)
This seems intuitive, but too often siloed KPIs work against bottom line success. For instance, the Managed Care team may inform you that they negotiated great rates for a MA-plan, maybe well above traditional Medicare rates. But, for several reasons, MA plans rarely have a contract yield that matches traditional Medicare. The UR team may work at reducing the “denial rate”. Ironically, we have seen time and time again such initiatives can be successful at reducing denials but result in significant revenue loss due to the hospital downgrading cases to observation because of an anticipated denial. Even worse, the UR team usually doesn’t even know that their efforts haven’t resulted in additional revenue. The UR team reports and celebrates reducing denials and assumes the problem is fixed. Similarly, the Managed Care team usually has little or no visibility into the actual performance of the contract even when it is time to renegotiate.
Hospital Revenue Erosion: The Five Key Areas
We have learned that there are five key drivers of revenue erosion:
- Contracted reimbursement rates
- Long stay observation rates
- Coding/Clinical Documentation
- Length of Stay/Cost of Care
- Billing Office practices
The most important takeaway is that all these drivers influence each other. For instance, a reduced long stay observation rate may reduce CMI (due to the subsequent increase in lower weighted medical inpatients that would have previously been incorrectly reimbursed as observation cases) but results in higher revenue. However, I have seen countless times the angst amongst the Coding/CDI/Finance teams when they observe the CMI dropping, not realizing that the hospitals just dramatically increased revenue. This is an example of the importance of recognizing the interdependence of the underlying key drivers of revenue erosion.
Common Hospital Misconceptions Regarding Medicare Advantage Payers
We have worked closely with many hospitals implementing this global approach to KPI’s. We have helped hospitals identify and deal with several misconceptions:
- “X is my Best Payer.” The payer that many believe is the “best payer” (perhaps due to a low number of write-offs or a short AR) is usually the “worst payer” in terms of actual contract yield.
- “One Strategy Fits All.” The drivers of revenue erosion are typically different for each payer – in other words, a single strategy in any department will not address global MA performance. You need to drill down into the root causes of revenue erosion for each payer and implement a strategy for that specific payer. This might seem overwhelming but focusing on the appropriate metrics will allow you to prioritize the issues that require the most attention first. Sometimes these issues are external – driven by egregious payer behavior. But frequently internal processes meant to drive individual departmental KPIs undermine performance with specific payers.
- “The MA Virus.” The hospital becomes “infected” with what I call the “MA Virus,” extending the requirements of one payer to all other payers, exacerbating the revenue erosion. A good example is coding. Certain payers will allow or disallow certain diagnosis codes in particular DRGs. Payers contract with companies that used to be former Medicare RACs to aggressively audit and down code various DRGs which are then accepted by hospitals (even when inappropriate). Going forward, HIM internalizes these denials and change its ongoing coding practices – not just for that specific payer, but for all payers. Like a virus, the coding change from one payer has invaded the coding “cell,” replicated itself for all other payers, and forever changed that cell in the future.
A New Way of Thinking About the Problem
In subsequent blogs, I will address how some of the factors that undermine performance are invisible to current analyses and how to change your strategies and tactics to capture and respond to these factors. For now, suffice it to say that getting a fair shake with MA plans is a complicated venture and requires a new way of thinking about the problem. This approach is certainly “globalist” in its approach from a departmental standpoint but is actually “nationalist” from the organization’s perspective. A successful strategy must have the goal of maximizing hospital revenue performance by aligning all areas of the revenue cycle towards this goal, often at the cost of changing departmental metrics and practices. This is the first, and most vital step.
Questions? Comments? Observations? Please email me at Drjoe@VersalusHealth.com. I would enjoy hearing your perspectives and sharing your solutions.