Why You Need to Know about Profit Cycle Management

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In my last blog posting, at the end of August, I wrote about my mother’s knee replacement surgery and wondered who, if anyone, got a good financial return on the operation.  Now, as we get to the end of October, the leaves are turning, it’s the middle of the MLB playoffs, and I find myself thinking about run differentials, wins above replacement player, and whether you should pitch your best reliever in a bases-loaded situation in the 7th inning, or keep him for the ninth-inning save.

Back in August, I promised you that my next post would discuss the future of revenue cycle management, which is something I’m calling “Profit Cycle Management.”  Don’t waste your time running to Wikipedia, because you won’t find this term there, and don’t go off running to the US Patent Office trying to trademark the term (I’ve already tried, and it’s not trademarkable).  But the concept is important, because it’s going to change the way that hospitals and integrated delivery networks think about their financial measurement systems.

For the past thirty years, many healthcare providers have thought about revenue cycle management (RCM) as a core competency of their operation.  RCM covered everything from the initial assessment of “can this customer pay or do they have insurance coverage” to “are we billing for every service we provided” to “have we captured all the revenue to which we are entitled, and if not, how are we going to do that?”  There are entire departments devoted to RCM, and I’ve met several customers who have the job title of Vice President of Revenue Cycle.

However, as financial models evolve, and payment reforms like shared savings, new capitation, and bundled payments shift the financial risk from the payer onto the healthcare provider, it won’t be enough to be a good revenue cycle manager.  You’ll need to manage the entire financial system – revenue, minus costs, to determine your own run differential (also known as profit).

These new value-based payment models will require a delivery network – and the financial professionals working in that delivery network –to understand and manage cost with the same precision that they manage revenue today. 

In the world of bundled payment, revenue collection may sound easier, but it’s not.  Now you are managing funds and distributing them to the various participants in the delivery network.  In the old world, whoever provided the service received funds from the payer.  In the new world of value-based payments, there is someone in the middle, namely the financial management professional, who has to break up the bundled payment and write checks to others.

In addition, there are dramatically more cost-related transactions that financial providers now need to manage to ensure that they can profitably replace that knee at the price that the insurance company is paying.  Some of these questions include:

  • How do you collect that information from the different providers, and at what scale? 
  • What cost information do you want to actually collect?  You may not want to collect the cost of every single gauze pad, but you will likely want to capture the total cost of the 15 physical therapy sessions, the five doctors’ visits and the actual operation itself.
  • Where are these services being delivered?  There is a good chance that services are delivered in multiple locations most likely using multiple clinical systems.

Depending on where you sit in the healthcare delivery system, your definition of “profit cycle management” will differ.  You may be more concerned about collecting payments from your ambulatory patient population, or you may be concerned around managing the costs across your broad delivery network.  Regardless of where you sit, there is one fact that impacts everyone – that financial risk is shifting from the payer to the provider.

Now, this change won’t happen overnight, as the industry will take its time to work out the kinks in the system and as CMS and private payers implement and modify their various ACOs models.  Many of the commercial payers already – United and Aetna being two examples – are also moving toward ACOs and higher risk reimbursement today, in many cases going beyond CMS model. Overall, it’s my belief that ACOs will be good for the healthcare system, because they have the potential to drive improvement in the quality of care, and help to eliminate waste from the system.  But that’s a topic for my next blog … till next time.

 

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