Margin Call: Reshaping Healthcare’s Service Line Evaluation Process
Many of us reading this short article have had the opportunity and privilege to be a part of the financial strategy considerations within a health system. It comes as no surprise that service line margin evaluations are a common “first-take” approach for leaders to understand their healthcare system’s effectiveness. Yet, many leaders miss the real question you should be asking yourself and your team: “are we getting the full picture by reviewing the right Impact Factors on our services?”.
A sustainable healthcare system implements a model that excels at balancing stellar patient outcomes, their community’s needs, and the financial wellbeing of their organization – this is true for both the immediate and future time horizons. Change in healthcare is not uncommon which means it is necessary that you use often overlooked, yet intermingled, Impact Factors when assessing your organization using service line based financial information.
Impact Factor 1: Value-Based Care
A truth that many leaders may continue to deny or push back on is the reality that reimbursement is continuing to shift in an impactful and at times unprecedented ways. The conventional model of volume-driven reimbursement which causes large quantities of unnecessary visits, duplicate procedures, and unnecessary testing is quickly dwindling. Many payors, including federal and local governments, continue to modify their reimbursements towards new and improved value-based payment models. Your organization must be able to understand the service lines in your organization that play a pivotal role in supporting favorable patient outcomes even if they are considered low margin in today’s structure. Estimates are showing that roughly 60 to 75 percent of a healthcare’s reimbursement will stem from value-based payment models by the year 2030. This change has been no secret, and this wave will continue for the foreseeable future. As a leader, you and your team can prepare for this Impact Factor by deeply understanding the mechanisms driving your reimbursement models. Further understanding how adjustments to these mechanisms influence the behavior in your organization, ultimately changing a service line’s contribution margin, is the future state of healthcare financial management.
Impact Factor 2: Symbiotic Services Along the Continuum of Care
Value-based care will have a major affect to your organization’s financial structure and to prepare for this you should further consider the inter-reliant departments and the bearings they have on each other. This is not only from an organizational perspective but down to each individual service line. You should be reviewing if your negative and low margin service lines are directing referrals to other service lines within your organization that may have improved reimbursement models with better margins. The understanding of how your patients flow through the continuum of care at your organization is a commonly overlooked Impact Factor, yet it is critically important. Your organization should be continuing to dig for answers even if you and your team believe you have the answer - there is always more to your story.
Impact Factor 3: Operational Inefficiencies
The Impact Factor everyone knows is there: Operational Inefficiencies. These hurdles have been overlooked in service line level reviews with many executive leadership teams ignoring the elephant in the room. Executive leadership teams typically choose to ignore this Impact Factor because the conversations and the questions that are needed to be asked can be difficult. Additionally, there will be times where the answer to these questions isn’t always clear for you and your team. You must remind yourself and your team that your objective is to provide long-term sustainability to best serve your community and your patients for years to come. Reminding each of your team members that asking these tough questions will pay itself back in dividends for the organization will give everyone the confidence necessary to face the tough questions. It is of utmost importance to understand all factors playing a role to a service lines poor (or excellent) contribution margin.
The damaging effects of operational inefficiencies can be explained using a case from your perioperative service areas. If your organization has challenges with operating room utilization, for example, it will lead to shrinking margins for various effected service lines due to the fewer medically necessary procedures being completed. Beyond contribution margin alone, these types of operational inefficiencies will cause long queue times for patients that need immediate care in turn leading to poor outcomes for patients. As covered earlier in our prediction for the future state of healthcare reimbursement, these outcomes mean that your organization will receive lower reimbursement amounts. It is inevitable that these negative effects begin to compound beyond the financial picture of the organization – leadership teams must be prepared to face these concerns.
Closing Remarks – The Final Scoop:
While it may be difficult to gauge the value added for providing specific services, when evaluating your organizations service lines you must consider these commonly overlooked Impact Factors. Understanding that your service line margins have several outside factors influencing them is the key that enables you and your team to draw accurate “big picture” conclusions. Again, be reminded that the mission is to provide the best possible care to your communities while remaining aware of the long-term impact of decisions being made. At Microscope we have industry-leading experts with proven track records of evaluating healthcare system’s needs and their likelihood of long-term financial sustainability. Asking the right questions, providing long-term value, while continually maintaining the ability to remain objective throughout the process separates our team from the rest.
Contact Today: Ryan T Corey | | 607.644.5097
