Patient Profitability and Cost Management is an imperative for healthcare insurance providers. This is being driven by both regulatory requirements and competitive pressures. Effectively addressing the challenges of patient profitability and cost management involves mastering a methodology, understanding the business drivers, changing business processes, and introducing a system that supports an efficient process. The impact of profitability and cost management ripples through to all management processes and is a key component of an overall enterprise performance management system.
Healthcare is important to everyone. Receiving quality care when needed to ensure a long and healthy life is a basic tenet of life in the United States. Securing the correct solution that balances financing and quality care is now the subject of great debate in the United States. With the Healthcare Reform Legislation the US Government has sought to ensure that all Americans have access to affordable quality care and insurance, however the legislation is meeting resistance by some states. Providers struggle to deliver quality care at a reasonable price. Insurers struggle to provide a fair and affordable funding solution. Government officials are trying to balance the needs of all participants to ensure a viable, long term, stable solution.
The traditional model of how employee healthcare benefits are provided is changing. Large employers providing a comprehensive benefits package are shrinking in numbers. These are being replaced by small employers and independent workers seeking healthcare insurance coverage on their own, or looking to join the regional healthcare exchanges defied by the 2009 legislation. This new Individual or Direct Pay model presents new challenges for Healthcare Insurers:
How do you underwrite a group of one effectively?
New credit and collection issues
Increased scrutiny on member interactions
Reshaping the benefit design to meet today’s needs
These issues are creating new informational challenges. Having accurate, immediate data to analyze is critical to maintaining a consistent, profitable revenue stream and membership.
Healthcare Insurers are operating in a volatile and fluid environment today. Government has enacted new legislation that could alter the way benefits are funded and delivered. Businesses are rethinking the benefit programs that they provide to their employees. There is a new focus on being competitive in a global economy. It is now more important that companies are able to compete on a global basis. This will help to ensure that companies remain competitive and keep jobs and opportunity here in the US. As a result, there are many new pressures on Healthcare Insurers:
Pressure to lower premiums
Pressure to increase benefits to address the needs of changing demographics
New legislative initiatives and increased regulations and oversight
Financial and tax incentives and burdens
Shrinking market of large employers
Trend towards small business and self employed
Need for more portability and stability of all employee benefits
Need to reduce fraud and increase claim payment accuracy
Detailed reporting on Medical Loss Ratios
Need to have a more current and accurate view of their business performance
Increased competition in the marketplace, combined with increasing health care costs, have forced healthcare insurers to place a premium on managing administrative expenses. With evolving complexity of product offerings, understanding product line and market segment costs become essential information for managing the business. Add to the business information need the complex compliance requirements imposed by government programs such as the Federal Employee Program, Medicare, and you have a very complex financial application requirement. All of these issues are creating challenges and opportunities for the Healthcare Insurers. Increased efficiency will allow insurers to maintain stability in their operations and rates. It will also allow them to react quickly to changes in regulation and in their markets. Receiving accurate information in a timely manner will allow them to make better decisions regarding their operations, markets and ultimately their long term viability and survival.
The Relevance of Profitability and Cost Management Today
The interest in profitability and cost management is re-emerging, and the topic is increasingly being elevated to the board‘s agenda. Profitability and cost management is more relevant than ever. There are multiple reasons for this, both on the tactical side—responding to internal and external pressures, and from a strategic point of view—increasing the organization‘s competitiveness.
Indirect Costs Are Increasing
Healthcare Insurers are continuously challenged to determine their organizational effectiveness. Despite modern processes and systems indirect costs are increasing. To reduce these costs many organizations are introducing shared service centers, centralizing certain operations either in the front or back-office. The economies of scale outweigh the overhead of such centralized operations, but the overhead and other types of indirect costs still need to be allocated. Profitability and cost management solutions help ensure the business relevance of shared service centers. Profitability and cost management solutions can also help establish whether these shared service centers should be placed within the organization or should be outsourced. In such an exercise, the burden of internal indirect costs can be compared and benchmarked against external services.
Competing on Service, Portfolio and Brand
It may be relatively easy to attribute revenues to the sales of specific products, but individual products alone do not make a competitive difference anymore. It is the service that comes with the product that makes the difference. Whereas Activity Based Cost Management (ABC/M) had a strong focus on the back-office as an analytical tool to optimize processes, profitability and cost management solutions can be used for service pricing—where the relationship between resources, activities, and revenues is not always easy to make.
Reporting structures tend to be hierarchical in nature. New plans and strategies are cascaded top-down into the organization‘s hierarchy. Conversely, most geographic or functional domains self-report to their management, and at the top all information about all costs and revenues come together. However, cost and value drivers seldom report ‗upwards‘ in a meaningful manner. Drivers tend to impact the organization ‗sideways‘, through the organization‘s value chain. Profitability and cost management solutions introduce ‗horizontal alignment‘, which is a crucial extension to the vertical alignment most organizations have. For instance, the most important cost driver for a claims department within an insurance company is the risk profile that the underwriting department is using. Too many accepted bad risks lead to an increase of claims, both in quantity of claims and in size per claim. The claims department actually has little means to influence total claim size, which can be up to two-thirds of the cost structure of an insurance company.
The cliché that business experiences higher cost and regulatory pressures will come as no surprise in the Healthcare market. Patients, suppliers, shareholders, and regulators, all demand more transparency. Executives cannot allow surprises regarding their profitability. They need to ensure that both cost and revenue are managed in alignment throughout the organization. A solid set of processes, a comprehensive methodology, and a robust system are needed to meet these requirements. In fact, if executives do not ensure such a level of control in a transparent and regulated world, it will cost them dearly.
How is Profitability and Cost Management Different Today?
Profitability and cost management traditionally has been an operational function because of the prevalence of ERP systems. These systems have a Chart of Accounts, ledger, sub-ledger, operating statements etc. This is a necessary structure to accurately reflect and record the financial activities of an organization. However, it has very little relevance to the products and services offered by the business. As a result, the majority of the profitability and cost management solutions in the business were relegated to a series of reports which were pulled together from disparate sources. Organizations often spent more time in reconciling the variances in reports than in actually understanding the data on the reports. As a result, Management had very little faith in these profitability reports. Profitability and cost management today is a strategic function. It has management attention and visibility. Today‘s profitability and cost management solutions are driving a key performance metric – the overall profitability of the business. It is not only reported upon but it is used as a strategic tool to driver change throughout the organization. It involves mastering a methodology, understanding the business drivers, changing business processes, and introducing a system. The impact of profitability and cost management ripples through to all management processes. The following is an overview of the stages most organizations experience as they mature in their approach to profitability and cost management.
Where does Profitability and Cost Management Fit in the Organization?
Profitability and cost management is integral to many areas of a healthcare insurer‘s operations. Visibility is important to assist in making strategic and competitive decisions for:
Executive Management Team
Underwriting and Actuarial
Sales and Marketing
Treasury and Asset Management
Choosing the Right Tool for the Job
The journey of profitability and cost management begins with creating a profitability model that can allocate costs and revenues. A flexible allocation engine that can be easily used by the business users is, therefore, a must. A flexible allocation engine provides the basis for more granular allocations, leading to more accurate profitability data. In most organizations, allocations are a rather arbitrary process.
While the granularity of allocations is the precursor for accuracy, the confidence in the accuracy of the allocations can still be suspect. Therefore, being able to visually trace the path that an allocation takes can quickly turn doubt into confidence, thus empowering users to make effective decisions. In addition, many healthcare insurance providers contract with the federal government and are reimbursed for administrative costs. These costs include overhead allocations and as such, allocations are subject to specific guidelines / rules that must be followed to maximize their reimbursement. Contractors perform audits of the payers systems to insure costs are allocated within the guidelines of their contract making the audit trail a vital feature of any system.
While allocations are necessary for accuracy, analyzing profitability data to discover the key drivers of cost and profitability is at the heart of a profitability and cost management solution. Therefore, having a robust analytic foundation is also a necessity. The analytic foundation needs to provide an intuitive user interface for ―speed of thought‖ analysis. Business users must be able to manipulate large profitability data sets to monitor complex scenarios, forecast outcomes, and perform what-if analysis to identify customer/product profitability trends.
Profitability and cost management solutions have traditionally focused on reporting and analyzing profitability—generally as an accounting, analysis or operational process. The users could report and analyze the data but there was no integrated or systemic process to execute the decisions stemming from the analysis. With profitability as part of performance management, profitability is not merely reported—it is planned, measured, and interpreted.
Profitability and cost management solutions today must provide a systemic process to execute upon and implement best practices discovered as a result of profitability analysis. There must be a closed-loop system between the profitability and cost management system and the budgeting and planning system so that resources can be strategically allocated as a result of the profitability data. Planning ensures that efforts are directed toward the achievement of corporate objectives. Measurement checks and adjusts progress against plans by matching revenue against costs incurred, making adjustments by tweaking processes to align with profitability metrics. Interpretation of profitability data helps identify developing trends that alert management to ask the right questions and take action.