Hospital professionals today are finding themselves stretched thin to address the various challenges that their organizations face. Unfortunately, hospitals need to achieve even more incremental revenue and cost reduction. The integration of the revenue cycle and supply chain holds unlocked value for hospitals to achieve the needed incremental impact.

Many organizations do not have standardized and enriched item level information available in their source systems. The same item may appear multiple times due to a lack of naming standards for part numbers and descriptions. Entries also frequently lack meaningful descriptive information, such as item attributes and manufacturer information, which help users search for the item during ordering or compare to other similar items to determine price variances.

There are firms in the marketplace such as Ketera that can provide up to seven levels of content cleansing and enrichment to provide organizations with the quality information needed to perform further pricing analysis or for creation of an electronic item catalog for future ordering. The existing information can also be further enriched by obtaining supplemental information about the item from the supplier’s or manufacturer’s catalog.

By performing this supplier cleansing and parent company identification, organizations are able to better understand their true supplier count, the true amount of spending with each unique vendor, and the true vendor count for particular categories or items. (See Figures 1 and 2.)

An organization’s raw purchasing data is frequently incorrectly categorized or does not have any existing category information. The Ketera algorithms are able to analyze each record to determine the relevant details needed for accurate categorization. The output of this process is purchasing information that has been accurately categorized to the organization’s preferred structure. This enables organizations to aggregate purchases by category and determine total suppliers and total amount spent for each category. (See Figures 3 and 4.)

Having a better understanding of your costs through better data provides a solid basis for evaluating your pricing. Changes in technologies and procedures make it an ongoing challenge to make sure that your pricing truly reflects the cost of providing services. On top of these changes, there is a trend towards increased pricing transparency and consumerism. In order to be competitive, hospitals should employ strategies that:

• Reflect a defensible, compliant approach – is the pricing in compliance with governmental payers? Can the cost build up and margin be justified with commercial payers?

• Balance market understanding with that of service offerings – How does your pricing compare with others in your marketplace?

• Knowledge of net revenue impact considering payment methodologies, contract negotiations, and costing intelligence

• Incorporate the charge capture processes – Accurately capturing the costs (and associated revenue) for the patient visit is critical to setting the appropriate pricing strategy. By not capturing all of the charges, you will have an incomplete picture of your cost and could result in pricing the service below the actual cost or at a lower margin than targeted

• Support national and state requirements for disclosure

• Sustain improved patient communication on their financial responsibility – Ultimately, the pricing information needs to be communicated at the Point of Service so that the appropriate co-payment and patient responsibility can be collected.

Understanding the procedures and supplies utilized for patient care is critical to determining if you are charging for all allowable items to result in accurate reimbursement. An area that is often overlooked is analyzing claims data to determine if the charges that should be expected to be seen with the other charges on the bill are being charged or that the proper revenue code for payment is being utilized. For example, specific chemotherapy drugs are considered Biologic Response Modifiers (BRM) and are used to treat patients with non-cancerous conditions, like Rheumatoid Arthritis. These drugs can be billed with Chemo Infusion Administration instead of regular infusion administration charges. By analyzing accounts with BRM drugs that do not contain a Chemo Infusion Administration charge it can be determined if the additional charge should be added to the account.

A common misconception is that if the payer contracts are not paid on a percent of charges basis then capturing all of the procedures performed or supplies utilized is not important. In practice, complete and accurate charge capture can be critical to capturing the appropriate reimbursement for contracts that utilize fee schedules, contain carve outs/outliers, or APC groupings. In addition, many payer contracts require particular revenue codes to be utilized to receive payment for certain procedures.

A factor that is often overlooked when developing your sourcing strategy is the impact from your managed care contracts. What a hospital’s managed care contracts allow them to charge for particular procedures and supply items vary widely so a sourcing approach of driving your pricing down to the lowest cost may not make financial sense. A total lowest cost approach does make sense in a lot of cases such as when your managed care contracts do not allow the supply item to be separately payable and just offer a fixed amount for the entire procedure. However, other items may allow the hospital to bill on a % of charges basis. In addition, the language in the payor contract may have some type of floor through which charges below a certain amount may not be reimbursable. In these situations, a lowest total cost approach may actually result in net revenue being less after the negotiations. Below are a few examples that illustrate language in various managed care contracts for some typical supply items. (See Figures 5 & 6.)

In these examples, while Hospital A’s materials management team perhaps should employ a lowest total cost negotiating strategy, a similar strategy employed in Hospital B and C may actually result in net revenue going down because charges may not be optimized. Imagine a situation where pricing in the charge master is tied to actual costs and the negotiating team for Hospital B just negotiated a world class price on pacemakers. Well, the team might be in for a rude awakening when upon telling the CFO that their hard work should save the hospital millions over the contract life, he responds by telling them "Great job but now our charges are 50% lower so you’ve actually added to the cost structure."

We believe enhanced coordination and communication between revenue cycle and supply chain professionals can unlock value. In addition, improved data integrity will lead to better sourcing and pricing decisions. Practitioners should keep these leading practices in mind:

• Clean up the data in the item and charge masters – do not wait for industry standardization efforts

• For key clinical supply items ensure you understand the hospital’s actual costs

• Identify root causes of missed charges

  • Active involvement by the clinical departments to help understand what procedures are being performed and what supplies are typically utilized

  • Staying current with CMS rules and regulations

  • Reviewing high cost or high use supplies that could be charged for separately

• Understand the relationship between your managed care contracts, payor mix and the potential sourcing strategies

Sustain key improvement initiatives through tracking actuals and measure supplier performance.