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Ensuring Financial Survival Via Proactive Contract Modeling

As reimbursement methodologies continue to evolve in the transition to value-based care, hospitals and health systems are having to rethink their strategies toward financial sustainability. New payment models, such as bundled payments and accountable care organizations, along with more complex contracts and general uncertainty about forthcoming changes are threatening the financial stability of many organizations.

A proactive strategy that is quickly becoming key to survival is contract modeling.

In this struggle to remain financially viable in this time of healthcare reform, healthcare providers have to better understand both what their services are costing them and what those services are earning them. Inadequate reimbursement will have serious consequence to the bottom line.

Contract modeling, or analyzing potential scenarios of reimbursements to understand financial outcomes, provides a proactive approach to financial management by analyzing the impact of different elements such as methodologies, rate changes, pricing, payor mix shifts and ever changing regulations on margins, rather than net revenue alone.

While determining at what point services will be profitable, or if there will be a profit, is challenging under new payment methods, contract modeling helps providers determine the financial outcome of proposed terms before signing on the dotted line.

Analyzing Financial Outcomes

Traditionally, contract modeling has been used to gauge the performance of contracts to detect underpayments and drive collections. Today’s reimbursement environment demands a more sophisticated analysis. Providers who limit contract modeling to one function are missing out on higher-level applications that can have greater benefits to the bottom line.

What happens to reimbursement as a higher percentage of the patient population ages into Medicare? What happens if the organizations enters into at-risk contracts? What happens if a payer changes reimbursement from a percent of charge to a per diem or case rate? What will the impact be if I opt-in to a bundled payment program?

By understanding the implications of these different scenarios, providers can be better armed with actionable data in contract negotiations with payers. Without such pertinent information, providers are either entering negotiations blind or using data culled from unsophisticated analyses that don’t dive deep enough into the details to be effective. Consequently, contract management teams are not able to negotiate as effectively as they would if the data were more accessible.

Contract modeling, however, presents a number of challenges that make it difficult to execute effectively. First of all, because reimbursement methodologies have become so complex, a significant amount of data is required to develop multiple models of a contract. Manual methods such as spreadsheets and traditional financial management software are often insufficient to handle the volumes of data required to conduct these analyses.

At the same time, providers are required to do more with fewer resources. Financial managers and data analysts need tools that enable them to develop data reports quickly and deliver this invaluable information to chief financial officers and other leaders. Tools that automate contract modeling provide both efficiency and effectiveness at providing actionable data and determining what contract terms will work best for the bottom line.

Multiple Analyses

To determine current and future performance, contract modeling can be applied to current contracts and various “what-if” scenarios. Some of these analyses include:

1. Medicare break-even computation. A simple way to evaluate the current state of contract performance is to conduct a basic Medicare break-even analysis. This analysis determines the financial impact if payment for all patient populations were according to Medicare rates. A Medicare break-even analysis is a way to benchmark how well commercial payers pay, and a way to evaluate the performance of key service lines, because it takes the payor mix out of the equation and instead uses a consistent reimbursement approach.

2. Assessment of performance of current contracts. This straightforward analysis determines whether payment is in accordance with the terms of the commercial contract. The analysis will, for example, determine which service lines have the greatest variances between expected and actual payment.

3. Assessment of proposed contracts. This “what-if” analysis determines how changes in the rate and terms of a proposed contract would affect the yield. Changes in clinical services, types of products (i.e., HMO vs. PPO), or even payers can also be modeled. This provides an understanding of, either in actual dollars or percent, whether the proposed contract will result in shortcomings or whether it will improve the bottom line.

4. Comparison of traditional and non-traditional reimbursement methodologies. Value-based payment models represent a new approach for providers. Many of these models put the provider at financial risk for meeting quality/outcomes targets, so understanding the financial implications of such methods before entering into a contract is critical. Likewise, modeling can help determine how implications of potential decreases in Medicaid funding resulting from changes or repeal of the Affordable Care Act, along with increased self pay and bad debt, will affect the bottom line.

5. Assessment of pricing changes. Contract modeling can be used to better understand the impact of chargemaster pricing changes. For example, if the charge for a procedure increased by 10 percent, the modeling can show how reimbursement would be affected.

Preparing for the Future

Staying ahead of the curve on the path to value-based care is becoming increasingly challenging for many hospitals and health systems. Organizations that have the greatest chance of surviving are those that are proactive rather than reactive to change.

As a tool that analyzes both cost and revenue, contract modeling is mission critical to prepare for change. By embracing and adopting this proactive approach, healthcare organizations can gain efficiency and visibility into what changes will mean for their bottom lines and will be better prepared financially for meeting the current and future needs of their patient populations.

Sidebar: Contract Modeling in Action

Before employing a dedicated solution to analyzing the performance of their contracts, financial analysts at Mission Health, a six hospital system based in Asheville, NC, used a manual approach that required extensive amounts of data for each patient population involved in the analysis. It was a cumbersome, time-consuming and inefficient task, made even more complex by the dissimilar terms of the more than 800 contracts among the health system’s multiple hospitals, says Damian Chipriano, manager of decision support and cost accounting for Mission Health.

Today, analysts at Mission Health use a contract modeling tool to increase their efficiency and produce more actionable data that is used to evaluate contract performance and negotiate more favorable contractual terms, Chipriano says.

“As with any organization in health care right now, we’re tasked to do more with less, and so time is very valuable. We want to make sure that we can be effective with our time, but also give our leadership the right knowledge as to what we need to do in order to sustain,” Chipriano says.

Mission Health’s analysts leverage the health system’s existing decision support data to model reimbursement rates and terms proposed by payers. With the contracting modeling tool, the manage care contracting team is empowered with data to better understand the financial implications of the proposals. Rather than requiring a few days of work to determine the impact of various proposed contractual terms, the technology boils that process down to just a few hours.

Mission Health’s team can negotiate more favorable terms.

“Effective and proactive contract modeling levels the playing field between the provider and the payer,” Chipriano says.

Beyond payer negotiations, contract modeling enables Mission Health leaders to better determine where to focus resources in order to direct cost savings. With only so many resources, the ability to pinpoint the best use of those resources is critical to sustaining a viable margin, Chipriano says.

For example, with a Medicare population at 50 percent and growing, performing a Medicare break-even analysis allows financial leaders to understand at what increment the health system earns a profit from managed care as a percentage of Medicare, or whether the system could be sustainable at Medicare rates. Analysts conducted such an analysis on cardiac services to determine whether operations were profitable. This information then provided the opportunity to understand at a procedural level where costs could be reduced within surgical services or supplies to improve the operating margin, Chipriano says.

Chipriano says there have also been unexpected applications for contract modeling. For example, Mission Health had to ensure that the size of the discount being given to its self-insured employee health plan was not larger than any discount given to any commercial plan, which would violate ERISA (Employment Retirement Income Security Act of 1974), which sets minimum standards for most voluntarily established private industry pension and health plans to provide projection for members in these plans the law.

The tool allowed analysts to understand the health system’s vulnerability according to service line, patient age group, and patient type, for example. Chipriano says analysts had to build only one report to answer multiple “what-ifs.”

“The tool is efficient,” Chipriano says. “It has helped Mission Health use our resources and our time more effectively. The bottom line is it takes a lot of the guess work out of the reimbursement equation.”