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By Eric Logue and Richard Bajner
In our experience, unit reimbursements commonly vary by 30 percent or more between commercial payers within a single provider's set of payers. However, recent consolidation of smaller payers (with high unit reimbursement) with larger payers (with lower unit reimbursement) is putting financial pressure on many providers that have historically made their margins on these smaller payers.
How can providers minimize margin risk as payer consolidation continues? To fully answer these questions, we need to understand the following key questions:
For the purposes of this discussion, we will measure parity by comparing the prices paid by two payers for the same services.
The lack of parity within individual markets is affected by several dynamic elements, including:
To assess a hospital's market, it is often useful to use analytics to frame the hospital's posi-tion. One tool is the four-by-four matrix that shows varying degrees of market share concentration between payers and providers (see the exhibit below).
Four-by-Four Matrix: Market Share Concentration
Consider the example illustrated in the exhibit:
Hospitals in Quadrant 1 have the dominant market share within a relatively fragmented market. The central issue with this enviable hospital position is that the market is dynamic and can quickly change due to increasing competition from non-hospital sources, such as free-standing imaging, ambulatory surgery centers, etc. Hospitals that begin in the advantaged position of Quadrant 1 often quickly slip into Quadrants 2, 3, and 4, if the hospital does not develop an active parity strategy that aligns value with payments.
The greatest level of parity will generally be seen in Quadrant 3 because this quadrant has comparatively more choices for both the payers and the providers. Therefore, it operates more like a free market, where supply and demand determines price; however, few markets exist where the payer and provider markets are both fragmented.
Our research indicates that two thirds of the 87 markets that we have analyzed have a payer concentration level of "highly concentrated" (based on Federal Trade Commission guidelines) using the Herfindahl-Hirschman Index (HHI) score, a commonly accepted measure of market concentration.
The HHI score is calculated using the number of plans active in a given location and their relative market shares. The highest scores would be given to pure monopoly markets. Generally, the dominant payer maintains and increases its ability to keep its market share through advantageous discount rates to providers, which in turn, results in providers generating a disproportionate percentage of their margins from smaller payers through higher per unit reimbursements.
As shown in the exhibit below, the largest payer's net margin/charges factor is 0.68, while smaller payers account for more than three times their margin share. Healthcare finance leaders must be cognizant of the risk that these smaller payers may exit these markets, resulting in the additional lives being driven (now even more) to the dominant payer at a lower unit reimbursement.
Net Margin/Charges from Large Versus Small Payers
In our recent experience, the impact of a smaller payer exiting a market, and the majority of lives shifting to the dominant payer, resulted in an overall decrease in revenue from the two payers (now one) by more than five percent to 10 percent because of the lower unit reimbursement enjoyed by the dominant payer.
Due to this effect, providers that enter into contracts with payers that allow substantive discounts to select payers without receiving an increased level of tangible service are:
Managed care executives need to balance the optimal parity strategy with the realities of staying within budget, as well as recognizing that some payers drive a higher volume of business. It may not be feasible to instantly move all payers in a market to parity; however, managed care executives should implement a three-year plan to move closer to parity.
Step 1: Measure parity. Plot the difference between payers on a trend line using total charges and percentage of yield. The exhibit, below, represents the typical payer volume to yield graph where the largest payer has some discount advantage.
Example: Payer Volume to Yield
Step 2: Target outliers. Identify tier two outliers. (For example, see payer C in the exhibit
Net Margin/Charges from Large Versus Small Payers.) Immediately negotiate rates upward, especially with those payers that have a history of denials, late payments, and a general lack of partnership with providers in the market.
Step 3: Consider targeted payer partnering initiatives. Open discussions with tier 2 and 3 payers and present shared cost reduction initiatives, narrow networks, and other methodologies for increasing overall yields. (It is important to note that partnering initiatives should be considered with all payers; however, smaller payers are frequently more motivated to consid-er alternative payment structures.)
Step 4: Measure and monitor. Review payment levels and market share on an ongoing basis to determine if targets are being met.
Many providers may look to drive even larger margins from smaller payers, especially in the short term, given decreased reimbursements from Medicaid, stagnant Medicare payments, and slow commercial enrollment growth. However, in doing so, providers may be setting the stage for continued payer consolidation. Providers that do not proactively manage their markets-by measuring parity and aligning value with payments-risk having parity forced on them through the consolidation of the payers within their markets.
Richard Bajner is an associate director at Navigant Consulting, Inc., Chicago, and a member of HFMA's Florida chapter (email@example.com).
Eric Logue is a director at Navigant Consulting, Inc., Chicago, and a member of HFMA's Georgia chapter (firstname.lastname@example.org).
Eric and Rich look forward to hearing from you. Feel free to post your thoughts or to contact them with any questions.
Publication Date: Tuesday, April 19, 2011
A leader from McKesson discusses how healthcare reform is forcing hospitals and health systems to take a different approach to capacity management and patient flow.
Patient financial engagement is more challenging than ever – and more critical. With patient responsibility as a percentage of revenue on the rise, providers have seen their billing-related costs and accounts receivable levels increase. If increasing collection yield and reducing costs are a priority for your organization, the metrics outlined in this presentation will provide the framework you need to understand what’s working and what’s not, in order to guide your overall patient financial engagement initiatives and optimize results.
Emad Rizk, MD, president and CEO of Accretive Health, discusses the uncertainty facing hospitals and the transitions affecting revenue cycle management.
No two patients are the same. Each has a very personal healthcare experience, and each has distinct financial needs and preferences that have an impact on how, when and if they chose to pay their healthcare bill. It’s no longer effective to apply static billing techniques to solve the complex challenge of collecting balances from patients. The need to tailor financial conversations and payment options to individual needs and preferences is critical. This presentation provides 10 recommendations that will not only help you improve payment performance through a more tailored approach, but take control of rising collection costs.
Jim Bohnsack, vice president, solution & corporate development for Conifer Health Solutions, explains how the company helps healthcare providers leverage data to deliver better outcomes while optimizing reimbursement for all payment arrangements.
This white paper, written by Apex Vice President of Solutions and Services, Carrie Romandine, discusses the importance of patient segmentation and messaging specifically related to the patient revenue cycle. Applying strategic messaging that is tailored to each patient type will not only better educate consumers on payment options specific to their billing needs, but it will maximize the amount collected before sending to collections. Further, targeted messaging should be applied across all points of patient interaction (i.e. point of service, customer service, patient statements) and analyzed regularly for maximized results.
Steve Scibetta, senior director of channel sales for Ontario Systems' healthcare product line, shares insights into effectively managing receivables.
This white paper, written by Apex President Patrick Maurer, discusses methods to increase patient adoption of online payments. Providers are now seeking ways to incrementally collect more payments due from patients as well as speeding up the rate of collections. This white paper shows why patient-centric approaches to online payment portals are important complements to traditional provider-centric approaches.
Elena White, vice president of risk, quality, and network solutions for Optum, discusses how healthcare providers can leverage data and technology as they enable risk in their organization.
Increased electronic engagement between healthcare providers and patients provides significant opportunities for improving revenue cycle metrics and encouraging patients to access EHRs. This article, written by Apex Founder and CEO Brian Kueppers, explores a number of strategies to create synergy between patient billing, online payment portals and electronic health record (EHR) software to realize a high ROI in speed to payment, patient satisfaction and portal adoption for meaningful use.
Somnia President and CEO Marc Koch, MD, MBA, explains how hospitals can drive transformative change in the perioperative experience for outstanding clinical and financial outcomes.
Faced with a rising tide of bad debt, a large Southeastern healthcare system was seeing a sharp decline in net patient revenues. The need to improve collections was dire. By integrating critical tools and processes, the health system was able to increase online payments and improve its financial position. Taking a holistic approach increased overall collection yield by 10% while costs came down because the number of statements sent to patients fell by 10%, which equated to a $1.3M annualized improvement in patient cash over a six-month period. This case study explains how.
PMMC President Roger L. Shaul discusses the effects of healthcare reform on revenue cycle management and how PMMC's products help clients adapt to a changing financial environment.
With the ICD10 deadline quickly approaching and daily responsibilities not slowing down, final preparations for October 1 require strategic prioritization and laser focus.
Greg Burgess, Founder and Chief Product Officer at Burgess Group shares insights and opportunities for payment integrity in the rapidly changing healthcare IT landscape.
Read how Gwinnett Medical Center provides clear connections to financial information, offers multiple payment options for patients, and gives onsite staff the ability to collect payments at multiple points throughout the care process.
Read how Orlando Health was able to perform deeper dives into claims data to help the health system see claim rejections more quickly–even on the front end–and reduce A/R days.
To maintain fiscal fitness and boost patient satisfaction and loyalty, healthcare providers need visibility into when and how much they will be paid–by whom–and the ability to better navigate obstacles to payment. They need payment clarity. This whitepaper illuminates this concept that is winning fans at forward-thinking hospitals.
Financial services staff are always looking for ways to improve the verification, billing and collections processes, and Munson Healthcare is no different. Read about how they streamlined the billing process to produce cleaner bills on the front end and helped financial services staff collect more than $1 million in additional upfront annual revenue in one year.
Effective revenue cycle management can be a challenge for any hospital, but for smaller providers it is even tougher. Read how Wallace Thomson identified unreimbursed procedures, streamlined claims management, and improved its ability to determine charity eligibility.
Before launching an energy-efficiency initiative, it’s important to build a solid business case and understand the funding options and potential incentives that are available. Healthcare leaders should consider taking the steps outlined in the whitepaper to ease the process of gaining approval, piloting, implementing, and supporting sustainability projects. You will find that investing in sustainability and energy efficiency helps hospitals add cash to their bottom line. Discover how hospitals and health systems have various options for funding energy-efficient and renewable-energy initiatives, depending on their current financial structure and strategy.
Health care is a dynamic mergers and acquisitions market with numerous hospitals and health systems contemplating or pursuing formal arrangements with other entities. These relationships often pose a strategic benefit, such as enhancing competencies across the continuum, facilitating economies of scale, or giving the participants a competitive advantage in a crowded market. Underpinning any profitable acquisition is a robust capital planning strategy that ensures an organization reserves sufficient funds and efficiently onboards partners that advance the enterprise mission and values.
The success of healthcare mergers, acquisitions, and other affiliations is predicated in part on available capital, and the need for and sources of funding are considerations present throughout the partnering process, from choosing a partner to evaluating an arrangement’s capital needs to selecting an integration model to finding the right money source to finance the deal. This whitepaper offers several strategies that health system leaders have used to assess and manage capital needs for their growing networks.
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