A series on Profit Cycle Management in Healthcare Part 1: The need for change


Healthcare organizations have been operating under a fee-for-service model for many years. As such, financial leaders have become well versed in implementing revenue cycle management systems and processes that primarily focus on the money that comes into an organization. Today, a new need is emerging. Healthcare reform and other system changes are moving the industry toward hybrid payment models such as bundled payments, shared savings, and capitation. To thrive in this new environment, financial leaders need to move toward profit cycle management – an emerging model that matches the revenues from new payment models with an improved understanding of the true costs to deliver patient care. The result: Positive financial performance – even in the face of declining payments – that can be reinvested in the mission to provide better care.

The foundation of any business or household is profit, defined as revenue net of expenses (and applicable as such even to not-for-profit organizations). Regardless of whether you are start-up, a Fortune 500 company, or a family of four, you need to ensure that you are bringing in more money than you are spending. In many businesses, the formula to determine your “profitability” is fairly straightforward. In healthcare, however, the situation is significantly more complex, as existing and new payment models make it difficult to determine exactly how much revenue is going to come in the door. For these and many other reasons, the need for a solution for profit cycle management that will help organizations generate a positive financial performance has become mission critical.

This change will not happen overnight. Rather, it will be an evolution over the next five years, as integrated delivery networks update their revenue cycle solutions to accommodate the new payment models, and as they deploy new activity-based costing solutions.

Top 5 Takeaways

  1. Healthcare leaders need to start analyzing and controlling costs with the same vigor used on the revenue side of the equation.
  2. Profit cycle management is an emerging model that matches the revenues from new payment models with an improved understanding of the true costs to deliver patient care.
  3. Costs associated with diagnosis, treatment and recovery all need to be factored into the equation, even when these services are delivered across several locations via several caregivers.
  4. Organizations need to implement information technology systems that are capable of supporting this new paradigm through enterprise-wide profit cycle management – enabling the organization to track profitability across care settings.
  5. The acceleration of value-based payment models (e.g. shared savings, capitation, bundled payments) reinforces the need for profit cycle management, as reimbursement rates are squeezed and risk is shifted to providers.

Stay tuned for part 2 of the series next week!


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