This story was originally published in Healthcare Business Today in August 2018.
Service line analytics are an essential tool for hospitals and health systems of all sizes. Whether you are a small hospital striving to ensure access to health services in your local community, or a regional health system looking to coordinate and optimize the delivery of care across multiple facilities, understanding the cost structure and profitability of all your varied surgical and medical services, both inpatient and outpatient, is critical to sound management and decision making.
Software solutions for service line analytics calculate the costs and revenues for every individual patient and summarize that data to deliver reports and dashboards at various levels of detail, such as surgical procedure, DRG and clinical service line, giving executives and managers the financial insights they need. With the right advanced analytic capabilities, service line reporting can be practical and affordable for hospitals of all sizes — and accessible to the whole management team.
Informing both operations and strategy
The profitability of specific clinical services, such as orthopedic surgery, cardiac care, and childbirth, is a key consideration for operational decisions about where process improvements are needed and where cost reduction efforts should be focused. Looking at the variation in costs by surgeon, for example, can highlight differences in clinical practice such as the selection of costly implantable devices, the utilization of minimally invasive surgical techniques, or scheduling procedures in an ambulatory surgery center.
Service line analytics also inform strategic decisions like expanding the volume of services by recruiting additional physicians in specific specialties or by investing in new clinical technologies. And understanding the hospital’s cost structure is more essential than ever as new payment methodologies — such as shared savings and bundled payments — drive a shift from volume to value. As fewer and fewer services are paid for under “fee-for-service” business models, executives cannot assume that extra costs will be covered by extra revenues.
The challenge of complexity
Analyzing the profitability of diverse clinical activities is challenging in large part because of the disconnect between the way revenues are generated and how costs are incurred.
The bulk of hospital revenue is driven by per-case and per-visit reimbursement rates that are determined by the patient’s clinical diagnosis or their primary surgical procedure. But costs are scattered across numerous departments, such as lab, radiology, nursing and operating room, that provide services to all types of patients across numerous service lines. To calculate profitability, you need to take all the expenses within a department and apportion those costs to each of the individual patients who were served by the department. It is only through this patient-level cost accounting process that expenses from departments can be aligned with revenues from clinical service lines.
The process of accurately allocating departmental expenses to patients is complex. Many different data sources must be combined in an intelligent way, including financial systems such as general ledger and payroll, billing systems with detailed patient charges, and electronic medical records systems with ICD-10 diagnosis codes and other clinical details.
Once all that data is in one place, several complex calculations are required. Expenses from overhead areas are allocated to patient care departments. Then, all the expenses in each patient care department are allocated to the individual patients the department served. Several different algorithms can be used for this purpose, including activity-based costing (ABC), relative value units (RVUs), and ratio of cost to charges (RCC). It usually makes sense to use a combination of these methods across the different departments in the hospital.
It’s not enough to just push all of a hospital’s different databases into a central data warehouse and layer a generic reporting tool on top of it. For meaningful service line analytics, you need a solution that fits all the different data sets together intelligently and applies multi-step costing methodologies to generate new pieces of information.
The importance of simplicity
Solutions for service line analytics need to manage all these diverse data sources and costing algorithms, while making sure every dollar is accounted for and providing an audit trail that gives managers confidence in the results. In the past, it often took a dedicated full-time financial analyst just to update cost information once a month. Now, technology can automate many of these processes, allowing hospital analysts to focus on the information needed to support management decisions, rather than spending their time on routine maintenance of costing details.
With cloud-based solutions built specifically for clinical service line analysis, small hospitals can get access to better information than ever before and larger hospitals can make their financial teams more efficient.