Patricia Tyson


As the focus shifts from volume-based to value-based health care under healthcare reform, hospital financial leaders will need to spearhead a strategic approach to understanding their organizations' true costs of care and improving care coordination among all parties.


At a Glance

  • A door-to-discharge analysis emphasizes a global view of care delivery to improve processes, eliminate waste, and reduce costs.
  • Key components of this approach are identifying information sources and collecting data, engaging physicians, using techniques such as Lean and Six Sigma, and improving documentation and coding.
  • Focusing on specific high-cost MS-DRGs, such as catheterization laboratory procedures and cardiovascular, joint replacement, and spine surgery, can produce early, significant results.

The 2010 Affordable Care Act brings many potential risks to a hospital's financial well-being. For example, if reform is implemented as the law indicates, 32 million more Americans will have health insurance by 2014. This additional demand on the country's already burdened healthcare infrastructure is sure to have unforeseen consequences. Indeed, the future impact of many of the legislation's provisions-assuming that they are implemented as outlined in the legislation-is difficult to foresee with any degree of certainty.

One thing is clear: Initiatives such as bundling of payments, formation of accountable care organizations, and implementation of value-based purchasing are propelling the healthcare system toward the goals of improving care through better coordination and collaboration and reducing costs for payers.

As laudable as these goals might be, hospitals face a significant challenge in adapting to the changes necessary to achieve them. The shifting focus from volume-based to value-based health care presents hospitals with a real prospect of decreased payments. And given today's payment environment, the picture is hardly a rosy one, especially for high-cost care. In 2009, U.S. hospital losses from patient care were a staggering $5.1 billion (Schuhmann, T.M., "Can Net Income from Non-Patient-Care Activities Continue to Save Hospitals?" hfm, May 2010). The March 2010 report of the Medicare Payment Advisory Commission to Congress showed all payer margins for many hospitals had fallen to their lowest level in more than 10 years, and MedPAC projected overall Medicare margins will be minus 5.9 percent by the end of 2010.

Nonetheless, value-based health care represents an important opportunity for hospitals and health systems. Forward-thinking organizations will seize this opportunity by focusing on making the monumental changes necessary to improve their financial health, both now and into the future.

The Finance Leader's Role

With the impending changes under reform, successfully managing the business of caring for patients has become everyone's responsibility. A hospital's senior finance leader has a critical role to play-not only as a financial expert, but also as an operations expert-in assessing how each component of the patient encounter has an impact on the overall financial performance of the hospital.

The finance executive will, of course, require a keen understanding of the new tenets of payment, including pay for performance and value-based purchasing. But he or she also should lead the organization in developing a strategic approach to understanding the true costs of care (including hidden costs) and improving care coordination among all parties.

A key part of this effort is to prepare for an environment in which bundled payments may be the norm. To this end, the finance leader should perform a detailed analysis of the hospital's revenue performance, including assessment of key indicators such as cost per patient day, supply costs per adjusted patient discharge, cost per case, and payment rates, to ensure the organization is not leaving dollars on the table. Such an analysis can provide the comprehensive perspective needed to operate successfully in the new reform environment.

Where to Begin

A good starting point for understanding the extent of the challenge facing the organization is to assess its revenue performance under the top Medicare severity-adjusted diagnosis-related groups (MS-DRGs) by volume. The exhibit on page 44 offers an example of one hospital's findings from such an analysis, showing negative margins in each of its top 17 MS-DRGs. The average cost and average payment information presented here is based on the American Hospital Directory (AHD) cost allocation method, which uses ratios of costs to charges calculated for each patient. The average for a base MS-DRG is total allocated cost divided by its number of discharges. The MS-DRGs provide up to three levels of severity for a particular condition. A "base MS-DRG" combines all levels of severity into a single category. This analysis looked only at payments from Medicare. (For additional information on the approach used to calculate average cost and payment information, go to

A hospital's clinical specialty areas may be centers of excellence, but they may also be centers of declining margins. Cardiology continues to be the highest-cost MS-DRG, followed closely by orthopedics and spinal care. With the tidal wave of baby boomers entering their intensive medical-use years, demand for these services will grow, so it also makes sense to perform a margin analysis on the key MS-DRGs in these service lines. An example of the results of such an analysis for our sample hospital is shown in the exhibit on page 45. The findings disclose that this hospital has negative margins in key DRGs for these four service lines and is losing more than $4 million on procedures reimbursed by Medicare.

With such information, the finance leader can begin aggressive action to stem the flow of additional red ink. An analysis of costs and payments from VHA's Physician Preference LYNXTM data warehouse and the Medicare Provider Analysis and Review (MedPAR) file suggests that hospitals, on average, will need to reduce costs by more than $1,000 per case to maintain a margin if all payers lower their payment rates to current Medicare rates. The best way to reduce total case costs is to perform a door-to-discharge analysis, assessing every step in the patient encounter. Such an analysis offers a means to examine key indicators with respect to key episodes of care, and could serve as the earliest indicator of the need to improve processes across the patient care continuum

The Need to Review Every Touch Point for Cost and Quality

A door-to-discharge analysis emphasizes the need to improve care processes, eliminate waste, reduce costs, and validate documentation and coding for appropriate reimbursement. It requires the hospital to review every component of patient care for specific DRGs in high-cost service lines to identify the actions required to achieve process improvements, cost reductions, and margin improvements.

Consider, for example, the typical care delivery steps for a patient undergoing an open-heart surgery procedure:

  • Patient presents at the emergency department (ED) for test and admission.
  • Patient receives cardiac screening procedure in the catheterization laboratory.
  • Patient undergoes bypass surgery in the operating room
  • Patient recovers in the intensive care unit.
  • Telemetry services are provided (including documentation and coding).
  • Patient is discharged.

The national average cost for a bypass surgery with a left heart catheterization procedure is $31,194. But the average payment by Medicare, at $31,162, doesn't cover the costs. So hospitals must analyze each area of cost and reimbursement. The total cost for the procedure comprises hundreds of clinical and operational decisions made by dozens of physicians and staff members during the course of the typical five- to seven-day stay. It is important for the hospital to work with physicians and nursing staff to evaluate each step for clinical appropriateness. Documentation and coding functions are also included, since properly documenting the patient's clinical condition impacts appropriate payment.

Key activities for understanding the patient experience and launching improvement efforts are:

  • Interviewing caregivers, patients, and families
  • Observing care processes and the care environment
  • Documenting what is happening, when it is happening, and where and how it is taking place
  • Collecting data from existing financial and qualitative sources and trending it over time
  • Comparing data with national benchmarks

The resulting information and data from this exercise should enable the hospital, physicians, nurses, and other staff to identify opportunities and collaborate on improvement initiatives.

Exhibit 1


 Exhibit 2


Gathering the Relevant Data

Benchmarking the organization's data against national averages and best practices is critical. Doing so provides a scorecard for the organization and a baseline for measuring improvement initiatives. In addition to comparing year-to-date expenses with the previous year's expenses, the finance leader should examine available data on the hospital's performance within the following contexts:

  • Operational (e.g., patient throughput, length of stay, services utilization review, and productivity)
  • Clinical (e.g., quality indicators, documentation and coding, payment rates)
  • Supply (e.g., price benchmarking, contracting, and supply utilization review)
  • Culture (e.g., readiness for change, relationship with physicians, and cooperation among departments)

Unfortunately, the tools typically used by healthcare organizations to measure clinical and operational data are far from perfect due to a combination of issues, including poor cost accounting systems and disparate data tools that are not designed to link clinical, operational, and financial data. The marketplace has offered a variety of data-collection tools designed for departmental reporting needs during the past 10 years, but the functional nature of the tools doesn't automate the cross-functional analysis required, leaving hospital analysts to link these data manually. Moreover, most data sources do not adequately represent costs and resources at the patient and physician levels-something that will be required to positively impact profit margins under new payment restrictions that could be more closely linked to clinical outcomes.

Nonetheless, the hospital will require data analytics that provide cost information for episodes of care. And despite the aforementioned difficulties, hospitals have many data sources from which to retrieve the requisite information, including:

  • Operating room systems
  • Billing and finance data
  • Electronic medical records
  • Cost accounting systems
  • Staffing schedules and labor costs
  • 30-day readmission rates by DRG, by physician
  • Length of stay
  • Patient volumes reports

Collective data expose inconsistent, redundant, or wasteful utilization of services and supplies that undermine quality of care and drive up cost. These data can also reveal clinical factors that may be contributing to high readmission rates. For the finance leader, these factors are a primary concern because in the new world of healthcare reform, hospitals falling in the lower quartile of 30-day readmissions for certain DRGs will be penalized with lower payments beginning in 2012.

Engage Physicians

Obtaining meaningful data is one thing; transforming these data into results-oriented actions is another. Physicians are the only stakeholders who can admit patients and provide direct care. Their practices directly impact utilization of supplies, equipment, ancillary services departments, and staff. So it is critical to engage physicians and use the results of the data analysis to educate them on the impact of their care decisions on hospital quality and cost metrics. The senior finance executive can play a pivotal role in advancing this transformational change with a review of strong clinically based financial data.

Dashboards composed of scattergrams and bar charts demonstrating physician performance against peer groups and national benchmarks can highlight existing issues and opportunities for improvement. These data can be used as a foundation for dialogue with the physicians whose metrics are outliers. This approach generally produces dramatic, positive changes, as long as the data are clinically focused.

As an example, consider the results of one hospital's review of its physicians' treatment decisions related to implantable cardiac defibrillator (ICD) procedures. Upon reviewing national benchmark data, the hospital discovered that the national ICD use mix is 40 percent biventricular (BiV) ICDs and 60 percent regular ICDs. However, the hospital's data disclosed that its physicians' use mix was just the opposite-60 percent BiV and 40 percent regular. Why did the difference exist, and how was it impacting the hospital's profitability in the cardiology service line?Because of the different types of devices, ICD procedure costs range from $17,000 to $23,000. However, CMS's payment rate for this MS-DRG is fixed, regardless of which device is used, at roughly $25,000-just slightly above the costs for the BiV procedure. CMS also has published specific guidelines for BiV ICD reimbursement.

By engaging the physicians in educational discussions about this care, CMS's clinical guidelines, and the cost issues, the hospital was able to change care processes around the guidelines.By using the most appropriate device for each patient, and properly documenting the patient's clinical condition, the quality of patient care remained high, and the hospital realized more than $500,000 in cost savings, as is shown in the exhibit.

Exhibit 3


A similar analysis can be completed for the other procedures in high-cost MS-DRGs involving implantable devices.

Uncover Hidden Waste

Hospitals should use the same door-to-discharge analysis to uncover other opportunities to eliminate waste and increase productivity. Improvement needs can be identified throughout the patient encounter by analyzing physician wait times, scheduling conflicts, capacity excess or constraints, inefficient workflow, and poor patient throughput.

Incorporating Lean and Six Sigma methods can help identify opportunities for improvement in departmental work flow and patient throughput, beginning with the ED or admissions and extending all the way through the patient care continuum. The aim of these approaches is to reduce errors and duplication to improve quality, productivity, and revenue.

Another goal is to eliminate all non-value-added components in a work process. Waste can exist in many different areas within a hospital and take many different forms. The following eight areas are just a few examples of places where a hospital can potentially eliminate waste and improve episodes of care:

  • Overutilization
  • Inventory
  • Defects
  • Processing
  • Transportation
  • Patient and physician waiting times
  • Work flow
  • People/staffing

The Future Is Not for the Faint of Heart

National healthcare reform will bring about the most sweeping changes in health care since the enactment of Medicare. The time to prepare is now. Visionary healthcare organizations are beginning to transition their organizations toward service line cost reduction and margin improvement as a standard focus. A door-to-discharge approach for analyzing episodes of care in high-cost DRGs is an excellent first step.

In performing a door-to-discharge analysis, finance leaders also should keep in mind that documentation and coding errors may be causing gaps in payment that need to be corrected. MS-DRG rules now require physicians to diagnose both a patient condition and its cause. This 2007 rule change continues to cause many documentation gaps, resulting in millions of dollars in claim denials, and lost or reduced reimbursement. It is therefore critical to perform, in addition to the analysis described here, a detailed review of the hospital's documentation and coding practices to account for any instances of lost revenue attributable to such errors. (For a more detailed discussion of the impact of documentation and coding issues, go to

Using the approach described here, hospital finance leaders can begin to shift their perspective to using the process of caring for patients as a basis for measuring their organizations' performance around quality, productivity, and cost.

This shift from cost-centered analysis to patient-centered analysis reduces tunnel vision and broadens thinking about ways to streamline processes, improve patient care, save money, and improve reimbursement.

The challenges in accomplishing such a shift are many. Just a few are:

  • Being able to access rich and meaningful clinical, operational, and financial data
  • Instilling a common language and metrics for success across multiple clinical areas
  • Enforcing accountability
  • Obtaining universal buy-in from a variety of stakeholders
  • Educating physicians and other clinicians on opportunities for improvement
  • Continually monitoring progress and fine-tuning processes to drive success

Hospitals need an executive champion to leverage the issues of healthcare reform and apply them to margin improvement. The opportunities for financial improvement are huge. Hospital finance leaders have a unique opportunity to take the lead in these efforts. For the finance executive, it represents an opportunity to steer a strategic effort that will not only improve the bottom line, but also improve the quality of care processes. In the new world of healthcare reform, these two are inextricably linked.

Patricia Tyson, RN, MSA, is vice president, performance services, VHA Inc., Irving, Texas (



Steps to Improving Margins by Reducing Total Case Costs

  1. Analyze the patient encounter for key procedures in high-cost service lines. Begin with a clear clinical knowledge of the encounter before working to identify opportunities.
  2. Collect and analyze the relevant data on quality,productivity, and cost. Gather national benchmark data for comparative analysis.
  3. Engage physicians through a clinical focus and relevant data. Identify practice variation and evaluate its impact on outcomes and costs.
  4. Compare processes and treatment pathways against the best practices for the selected MS-DRGs and services lines.
  5. Uncover the hidden costs in care delivery, including waste and inefficient productivity.
  6. Incorporate Lean Management and Six Sigma methods to analyze and create improvement strategies.
  7. Focus on implementation and turning data into action.
  8. Scrutinize documentation and coding to determine whether documentation issues are causing incorrect reimbursement and must be corrected for the hospital to receive appropriate payment.
  9. Create ongoing monitoring systems to evaluate key operational, financial, and clinical metrics to sustain improvements.


Publication Date: Wednesday, December 01, 2010

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead