This document discusses the importance of cost and charge management for hospital margin. It notes that the US spends the most on healthcare per capita but does not have lower mortality rates. Hospitals are facing financial challenges from rising costs and shrinking reimbursement as the industry shifts from fee-for-service to value-based models. Margin, or net operating income, is key to a hospital's financial survival. The document outlines cost management and charge capture as the two main levers for improving margin, and discusses common issues that can lead to lost charges and reimbursement if not properly managed.

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2023 – Focus on the
Margin

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Agenda & Objectives

3. Agenda
1. High level –US the highest cost provider with high mortality
2. Why Margin Matters
3. Moving from Fee for Service to Value brings Cost
to forefront
4. Cost Management – An essential component of
margin management
5. Charge Management – The second component of
margin management
6. A system strategy to move forward with cost and charge in
perioperative areas, including Cath Labs
7. Some Examples

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Objectives
• Participant will be able to identify two components of margin management
• Be able to state the importance of patient activity cost management
• Be able to state how charge capture alone is insufficient
• Be able to describe two actions that participant can take back to their organization

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High Level Factors

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Per Capita Spending on FFS

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Higher Costs Do Not Equate to Lower Mortality

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American Healthcare Executives (ACHE)
• Healthcare delivery is challenged more than ever before post pandemic
• They list the top 3 concerns, as ranked by healthcare executives as:
• Personnel shortages
• Financial Challenges
• Quality and Safety challenges
• Also included in the top 10 is population health management

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Financials
• This has always been a focus of facilities however now seeing:
• Increased medication and supply costs
• Increased payroll and contract labor
• Capped / shrinking reimbursement
• Culture of Fee for Service requiring change to value care and/or fully capitated services
changing the focus to Per-Member-Per Month methodology.

10. Who should get
care and when?
What care should
be included?
Is each care
component
delivered
efficiently?
Needs
care
Received
care
Current State Ideal State
Waste Category
Question
Case-rate utilization
(# cases per population)
Within-case variation
(# and type of units per case)
Efficiency
(cost per unit of care)
Symbol Key Improvement
• Fewer inappropriate
cases
• Early intervention
to prevent disease
or injury
• Only the right care is
included: avoid
duplicate testing and
eliminate
complications and
less effective
interventions
• Do what we
know works
• Lower-cost
drugs and supplies
are used
• Technical and
administrative
processes are
streamlined to
reduce indirect costs
Behavioral consults
Procedures
Labs
Drugs
Patient education
Diagnostic test
Time
(both patient and
clinician time)
Resources
(both direct and
indirect costs)
=
=

11. 3 Major Payment Models (Business
Models in Healthcare)
Fee-For-Service
 Insurance pays Care Delivery System for each and every component of care
– Example: A surgical back procedure includes 3 lab tests, an MRI, and 4 medication doses and a 5 day stay in the
hospital – the health system receives payment for each individual care component
Bundled per Case
 Insurance pays a pre-negotiated set amount for a specific type of procedure
– Example: A health system receives $50,000 for a spine fusion surgery, regardless of how many lab tests, medications,
MRIs are used and how long the patient stays in the hospital
Condition Capitation / Full Capitation (Provider at Risk)
 Insurance pays a pre-negotiated monthly rate to care for a population of patients
– Example condition capitation: Insurance agrees to pay $225 per member per month to care for a population of
patients with back pain issues (whether they get surgery or not)
– Example full capitation: Insurance agrees to pay $525 per member per month to care for all health issues for a
population

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Why Margin Matters

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Deloitte LLP
https://www2.deloitte.com/us/en/blog/health-care-blog/2022/2023-outlook-for-health-care-could-margins-staffing-stall-progress-to-future-of-
health.html?id=us:2em:3cc:4dcom_share:5awa:6dcom:health_forward_%E2%80%93_a_health_care_blog_%7C_deloitte_us
2023 Outlook for Health Care
Could margins/staffing stall progress to the Future of Health?

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Margin Defined - HFMA
https://www.hfma.org/finance-and-business-strategy/1113/

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Kaufman Hall Margin Review 2022
”A new Kaufman Hall analysis noted that U.S. hospitals and health
systems are experiencing some of the worst margins since the
beginning of the pandemic, and 2022 continues to be on pace to be
the worst year of the pandemic in terms of financial performance.
Expenses remain at historic highs, leaving hospitals with cumulatively
negative margins. The median Kaufman Hall Year-To-Date Operating
Margin Index reflecting actual margins was -0.98% through July,
underscoring the continued losses hospitals have experienced this year.
Inflation and labor shortages contributed to total costs climbing 9.6%
YTD.”
[https://www.aha.org/news/headline/2022-09-01-kaufman-hall-halfway-through-2022-hospital-margins-are-still-red]

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Medical Economics 10/17/22 Publication
‘While 2022 YTD median operating margin is 4.6%, there is a large degree of spread, with nearly one third of the
health systems analyzed operating in the red. This represents a significant decline in performance when
compared to 7% in the baseline year of 2019 and 7.9% in 2021. Additionally, 2022 YTD operating margin on
patient revenue is down 58% compared to 2019 pre-COVID operating margins and down 68% compared to
2021, according to the report.
Rising costs are an issue for health systems and hospitals. Labor, supplies, and drug costs are up as patient
acuity remains mostly unchanged.
For acute care hospitals, the 2022 YTD median inpatient total cost per encounter is up 29.4% compared to 2019
and up 7.2% compared to 2021. For these hospitals, the median cost of direct patient care per encounter is up
54.3% compared to 2019. Additionally, the median supply expense per encounter has increased 17% since 2019
and the median drug expense has increased 33% for the same period.”
[https://www.medicaleconomics.com/view/hospitals-continue-to-struggle-with-margins-as-costs-rise]

17. PAYMENT METHOD
% of all
waste
45%
40%
15%
Case-rate Utilization
(# cases per population)
Within-case Variation
(# and type of units per case)
Efficiency
(cost per unit of care)
1.
2.
3.
FFS
Per
case
Provider
at risk
Note:
For green arrows,
savings from waste
elimination accrue to
the care delivery
organization.
For red arrows,
savings go to payer
organizations.
Financial Incentive Alignment
Under Different Payment Mechanisms to Remove Waste
*Adapted from James Brent C and Poulsen Gregory P. The case for capitation: It’s the only way to cut waste while improving quality.
Harv Bus Rev 2016; 94(7-8):102-11, 134 (Jul-Aug).
WASTE REMOVAL LEVEL

18. Net
Operating
Income
(NOI; margin)
Total revenues (+)
(top line)
Total operating costs (-)
(bottom line)
Financial Survival = Operating Margins

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Do we know what we should we be doing?
• Quantify ideal process potential gains
• Identify root cause of process challenges/pains
• Re-design and improve processes
• Follow Evidence-based guidelines & protocols
• Establish expert consensus
• Standardize work operationally
Can we measure how we are doing and
predict how we will do?
• Capture correct data about the process
• Integrate all relevant data
• Grant access to data broadly
• Generate insights from data
• Promote more informed decisions and actions with better
tools
Can we transform?
• Educate People to learn required
• Skills
• Knowledge
• Attitudes
• In addition, Accelerate Adoption with
• Strategy
• Competences
• Culture
• Operating Model
What value can we realize?
The Measurable Improvement:
• Health impact
• Lives saved
• Lives improved
• Financial impact
• Revenue enhancement
• Productivity gain
• Cost avoidance
• Hard cost reduction
• Shared savings
• Experience impact
• Patients & their families
• Clinicians
• Admin/support staff
Value Creation Framework

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The Levers to Pull for Margin Enhancement
• Increase charges and/or volume of services
• Fee for Service
• Increased quality measure and cost-effective management
• Value based and capitation driven
• Cost avoidance
• Avoid high cost setting for care
• Manage in the most cost effective setting
• Inpatient care will be most costly – one avoided stay may enhance the margin contribution
better than the reimbursement

21. Revenue growth:
5 to 9% contribution
for each case added
Quality and Practice Patterns
eliminate waste:
50 to >100% contribution
for each case avoided
MUCH Higher Financial Impact:
Quality eliminating waste vs. Revenue Growth
Net
Operating
Margin
(and return
on investment)

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Cost Management:
Key #1 Lever to Margin
Management

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Kaufmann Hall 2022 – Current State of Hospital Finances: Fall 2022
• https://www.kaufmanhall.com/sites/default/files/2022-09/KH-Hospital_Finances_Report-Fall2022.pdf

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How does it work for a Patient-Facing Cost Center?
• We know the total costs of every account in every Cost Center on a monthly basis from
the general ledger:
– In a given month, the Operating Room has roughly:
• $2,000,000 Medical/Surgical Supplies
• $400,000 Salaries and Benefits
• $250,000 Other (Purchased Services, etc.)
• However, the OR is Supported by other functions that are accounted for in other cost
centers in the general ledger:
– Unit Supporting:
• $150,000 Utilities, Maintenance, Environmental Services
• $100,000 Depreciation
• $75,000 Central Benefits
– Indirect:
• $300,000 HR, Finance, Administration, etc.
24

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We know the Operating Room provided services to 1,000 patients, with total Operating
Room Time of 100,000 minutes (Room Out – Room In)
 Of the $2,000,000 in Medical/Surgical Supplies:
– $1,981,886 are documented in surgical logs (tied to a patient encounter)
– $18,114 Unit Supplies (remainder of Supplies from GL)
 Other Direct and Indirect Costs:
– $400,000 in Reg/OT Salaries and Benefits
– $250,000 Other (Purchased Services, etc.)
– $150,000 Utilities, Maintenance, Environmental Services
– $100,000 Depreciation
– $75,000 Central Benefits (non-FICA)
– $300,000 Indirect (HR, Finance, Administration, etc.)
The system calculates the Cost per Minute for each Cost Pool and each patient receives a
portion based on their time in the OR
How does it work for a Patient-Facing Cost Center?

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RCC COSTING FLAWS
EXAMPLE: NURSING UNIT
Patient A Patient B Patient C
RCC 0.263
RCC Cost $816
Minutes 1,467
ABC Cost $934
RCC 0.263
RCC Cost $816
Minutes 1,232
ABC Cost $785
RCC 0.263
RCC Cost $816
Minutes 1,308
ABC Cost $833
RCC 0.263
RCC Cost $816
Minutes 1,232
ABC Cost $785
Difference ($32)
RCC 0.263
RCC Cost $816
Minutes 1,467
ABC Cost $934
Difference $118
RCC 0.263
RCC Cost $816
Minutes 1,308
ABC Cost $833
Difference $17

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RVU COSTING FLAWS
EXAMPLE: MRI SERVICES
MRI Upper Extremity MRI Pelvis MRI Brain
RVU 1.62
Cost / RVU $34
RVU Cost $55
Minutes 40
ABC Cost $116
Difference $61
RVU 1.46
Cost / RVU $34
RVU Cost $50
Minutes 87
ABC Cost $250
Difference $200
RVU 2.36
Cost / RVU $34
RVU Cost $80
Minutes 39
ABC Cost $112
Difference $32

28. Full Consumption Costing and Clinical Variation
Lumbar Spinal Fusion (n=852)
28
20%
Surgical Services
Avg. cost per procedure: $3,530
$8,270
66% 161%
67% 184%
14%
Nursing
Avg. cost per procedure: $2,520
4%
Interventional & Diagnostics
Avg. cost per procedure: $710
Supplies, Blood, and
Drugs
Average cost per procedure:
$9950
45% 162%
53% 203%
35% 333%
8%
All Other
Avg. cost per procedure: $1,510
67% 155%
Consumption Driver
$9,950
45% 162%
=
55% 155%
$18,220
variation
variation
variation
variation
variation
variation
Direct (54%) Service Center (46%)
variation variation
Surgical Services: OR Case Minutes – Room-
in to Room-out time, Staff Time
Nursing: ADT Minutes – Time patient was in
bed (NOT # of room charges)
Interventional Diagnostics: Lab count,
Imaging time (MRI), Imaging counts (X-ray)
All others: varies by service

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Charge Management
Key #2 to Margin
Management

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Factors Impacting Margin in 2023
Increased Supply
Increased
Pharmaceuticals
Increased Labor
Increased Inventory
LOST CHARGES !
Shrinking reimbursement
Capped procedures
Move to Value away
from Fee for service
More bundled
procedures
Costs
Reimbursement

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Charge Leakage
• HFMA in 2017 stated about 1% of net patient service revenue (NPSR) is attributable to
charge capture leakage
• Within the industry, different percentages are stated but average 1-3% of NPSR
• Despite automation charge capture processes still occur within silos continuing the
charge loss phenomenon
• Charge leakage contributes to lost NPSR and degrades the margin
• The cost to perform the service has been booked against the margin (negative margin)
• Loss of potential reimbursement not only results in lost revenue but acquired costs affecting
the margin negatively in both cost and charges.
• Managing charges before the claim is generated is essential
• Avoidance of rework due to charge leakage and late billing
• Requires looking beyond basic charge reconciliation to a more robust data driven process
• Technology
• Identification of opportunities through charge association and rules processes

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Common Charge Practice Issues
Service Line Charge Errors Causes
Pharmacy Units of Service Below Expected
(especially chemotherapy)
Conversion Error from Dispensed to
Billed
Pharmacy Medications charged without
administration
Lost highly reimbursable
administration charges
OB/GYN Non-invasive testing frequently not
charged
Lost separate reimbursement
Operating Room Procedures are coded based on
EMR without the correct time
charges
Lost revenue from lost time
charges
Operating Room Devices Incorrect charges, late charge,
HCPCS coding for devices is
inaccurate
Reimbursement can be affected by
all of these items
Emergency Services Blood Transfusions, Injections /
Infusions and Vaccinations, lost
procedure charges
Items can result in lost revenue
especially on outpatient basis

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Common Charge Practice Issues
Service Line Charge Errors Causes
Infusion Devices Frequently missed as a bedside
procedure, observation procedure
or outpatient infusion clinic
High volume procedures that are
missed consistently
Endoscopy Suite Frequent charge loss from time
charges without complete coding,
recovery room without procedures
Soft coding (HIM) and Hardcoding
(CDM generated codes) collide
Excessive Units of Service MUE and P2P edits (compliance) Cause claim submission errors
Medical Necessity Errors Failed Medicare / Payer medical
necessity guidance
Line item or claim denial
Radiology Missing Procedures – see 70xxx
series but no procedure charges
Lost revenue
All service lines Incomplete or failed charge
reconciliation
Lost charges / lost reimbursement

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Common Charge Practice Issues
Service Line Charge Errors Causes
Cardiology – Non Invasive Charge loss for radioisotopes
without the stress test tracing
Different departments charging
same procedure
Cardiology – Invasive Missing devices, devices with
wrong HCPCS Codes, Missing
primary procedures
Multiple issues with the Cath lab as
they generally place charges into a
Cath lab bolt on system
Charge Description Master Old codes, deleted codes, missing
modifiers
CDM creates both charge and code
and CDM accuracy is paramount
Personnel Late charges, missed charges, failed
charges for supplies
The human component always is
the weakest link
Interim / Travelling Staff Unfamiliar with the system, charge
capture is secondary they are there
to provide care
Human component is always the
weakest link
Information Systems Charge mapping is inaccurate –
charging wrong item or failed to
charge at all
Complex EMR and Charging
systems with documentation driven
charges

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Charge Capture – Pre Bill or Post Bill ?
• Charge capture can be performed as a pre-bill review or post-bill review
• Pre-bill would require 100% of daily itemized charges to be reviewed
• Post-bill would require the detailed charges from the UB-04 / 837i data set
• Each present advantages and disadvantages but both require 100% of the
charges to be processed on a daily basis
• Objective:
• To review 100% of the charges against a benchmark coding and billing source
that will identify aberrancies to review and remediate

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Rule Classifications
• Generally rules and AI are based upon two major pillars of:
• Revenue producing rules – rules that are created to ensure all earned revenue is captured
• Compliance review rules – rules that review the charges for compliance such as required
diagnosis codes, medically unlikely edits (MUE), NCCI and other coding and medical necessity
requirements.
• Within each of these pillars there are further charge divisions specific to:
• Inpatients
• Outpatients /Observation / Emergency Services
• Physician / Professional

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Charge Capture Process
Ingest
Itemized
Billing
Compare against
Coding and
charging
standards
Identify
aberrancy
Review EMR
Confirm
Documentation
Present
Identify the
missing charge
Add the charge
Place back into
queue for billing
Billing
Complete

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Know the Targets and the Triggers
• In the case of the itemized charge the trigger will be that procedure, service, supply or
pharmaceutical that is charged
• The “target” will be the missing charge item
• Rules based logic will ingest 100% of daily charges
• If a “trigger” is in the charges THEN
• Look for a “target”. If the Target is present the rule does not fire
• If the “target” is not present then the rule will fire for human review
• By incorporating technology the ability to review 100% of charges is possible when only
targeted audits were previously possible
• Some EMR vendors do incorporate a method to do this, such as EPIC Revenue
Guardian™ however, these require the facility to build and maintain the rules
• Other vendors create a complete rule library and maintain the library allowing for a “bolt
on” technology to be an efficient approach which does not require the facility to
maintain the rules.

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Trigger Charge is J2019 Requiring a Target (Without) to also be charged

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Daily & Historical Insight(s) Behind the Charge Leakage

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Meeting the Objectives
• Ability to review 100% of daily charges, have vendor maintained rules and be able to
customize any rule the objective(s) are met:
• Enhanced visibility and root cause identification / remediation
• Reducing charge leakage below the national standard of 1-3%
• Contribute to the margin through earned reimbursement
• Reduce re-work and failed claims
• Reduce future denials
• Ensuring compliant charge capture

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Examples

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Margins - Transformational Change: Blood Management
Revenue only a
fraction of the margin
VitalIntegrity
Charge Capture
Demonstrates areas
of cost management
that are impactful -
Ex: Blood
Management
Power Costing
Patient Activity
Costing
Provides insight into
area, cost of units,
reconciliation and
ensure blood
management
maximizes cost
efficiency while
providing quality care
Blood Management
Accelerator
Blood Management
Accelerator

44. Example #2: Variable Costs by Provider Comparison
Opportunities by Cost Drivers from Costing Data for Providers with 45+ Cases
Dr. Smith’s cases have an
average cost that is 41%
higher than other providers
Vast majority of
opportunity is within
medical supplies
Is Dr. Smith using more
expensive supplies or a
higher quantity of supplies?
Dr. Smith spends less time
per case on average in the
Cath Lab and has lower
average Cath Lab costs
Atrial Fib.

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Summation

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Summation
• The pandemic has changed the healthcare landscape permanently
• Rapid change to lesser cost to provide locations has impacted facilities
• Charge capture remains the mainstay of reimbursement however with shrinking
reimbursement and move to value the focus changes to focus on cost to provide
• Insight into cost management is especially important in high dollar high volume
departments such as surgery, Cath lab, supply chain and medications
• Ability to decrease charge leakage now requires that technology be utilized to ensure
100% review of daily charges
• Outdated costing methodologies based on charges or RVUs provide a distorted view of
margin
• By examining costs independent of charges or revenues you can identify the true
variation in clinical practice

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Questions?