Stephan Betz, Ph.D.,CCAP
Health Services Financing through Increased Productivity
© Stephan Betz 2016 For copyright questions please contact firstname.lastname@example.org
Table of Contents
The financial structure of California’s Health Services and Behavioral Health Systems is hard to understand and even harder to manage. Too many regulations are piled on one another to make a streamlined care delivery and billing system possible. All the more reason for executives to take a 360 degree view in every decision they make and ask themselves every time: “How will my choice affect the consumer? How will it drive or hinder organizational learning and workflow? Will my budget still be in balance?”
Looking at the big picture, managers need to consider that every cost saving measure in outpatient services may return an eightfold cost increase in hospitalizations; every technological innovation may result in cost increases rather than savings if implemented outside the forecasted timeframe. Therefore, best decisions are made keeping all four disciplines of the organization in mind. They are:
Good leaders will balance the measures in all four disciplines in a scorecard while focusing on the fifth discipline, motivating employees to improve the system-as-a-whole. The best health organizations have implemented this approach. The following case example summarizes their experiences and reviews the performance of a fictitious organization, the Betz County Health Department, in light of the four disciplines. While its facets may be similar or different from the reader’s organization, the design and process of building accountability through a Balanced Scorecard is always the same.
The state of an organization can be represented in a single number in the Balanced Scorecard. It shows whether the organization is meeting its targets and to the extent to which it is on / off target. Ideally, the measures in each discipline will balance each other out to zero for a perfect balance. In the example below, the Betz County Health Department (BCH) is out of balance and underperforming by -27.6%. Further exploration of the details that come together in this number shows that the organization must get resources aligned to its mission and purpose, trim some existing services that are not serving its mission and expand new ones where it can earn higher revenues. The Balanced Scorecard is the Director’s tool to monitor the health of the organization. Managers decide what parts of the organization they choose to measure in order to gauge whether the organization is in balance and can be held accountable.
The core equation for the Balanced Scorecard captures the level of fiscal solvency (the organization’s ability to have a long-term balance between assets and liabilities):
Revenue - Claims Denials = Expenditures + Annual Reserve Contribution
R - CD = E + ARC
It is the guiding post for all other aspects of the scorecard. After all, if the organization cannot pay for its expenses, it will fold sooner or later. Therefore, Balanced Scorecard tools should enable managers to balance the equation for fiscal solvency. The following case review will dive into details of the application and available tools. Each section describes one of the four Balanced Scorecard disciplines. The aim is to align the tools across the four disciplines along the mission critical trajectory to achieve continuous fiscal solvency. As a result, managers focusing on mission critical activities will support eliminating waste. This effort leads to reduced expenditures and increased revenue, productivity and organizational efficiency. As Managers infuse workers with awareness of the Balanced Scorecard measures, this process helps staff understand the links between them:
Therefore the equation can be summarized as:
R - CD = E + ARC supported by:
Learning and Growth
Balancing activities and resource allocation among the four disciplines requires defining each by objectives and measure performance against a chosen target. The performance is of course fluid and must be monitored at least monthly. In the following example, the BCH aims to balance its resources throughout the organization but underperforms by 27.7%. The factors contributing to this score will be discussed below.
Reduce In-patient Hospital Costs - Medi-Cal
Reduce In-patient Hospital Costs - LOS
Maintain TCM / MAA eligible productivity rate encounters
Reduce Placement Costs
Adult clients will receive timely access to services
Handle all grievances within industry standard timeframes
Children will receive timely services according to State standards
Vision and Strategy
Meet BH Standard of Access to Services
Improve provider productivity rate
R - CD Balance:
= E + ARC
Appointments are kept
Learning and Growth
Implement Meaningful Use for EMR
Implement Meaningful Use for HIE
Increase Efficiency through Technology Innovations
The Balanced Scorecard framework compares management performance measures to financial metrics. Where performance lags behind targets, operational areas and workflows must be improved to achieve the equation for fiscal solvency. Balance scores show how resources should be allocated across the organization to meet performance targets. A real time dashboard displaying performance measures can help executives to re-direct their efforts to the disciplines where performance improvements are needed and resources re-distributed. A short review of the case example shows that the four areas perform differently:
Finance: BCH decided to manage finances by reducing costs of inpatient admissions by ensuring Medi-Cal billing and managing length of stay. Since many consumers are Medi-Cal eligible, BCH aims to maximize Medicaid Administrative Activities (MAA) and Targeted Case Management (TCM) billing. However, BCH failed to staff up outpatient services sufficiently to minimize inpatient admissions, and therefore was unable to meet the target for inpatient admissions. This increased length of stay and reduced MAA billing, causing the organization to underperform 28.3% below its target for Finance. Its composite score of 65.0% attributes the same weight to each of the three components: Medi-Cal billing, Length of Stay, MAA / TCM billing and lowering placement costs.
Customer: BCH excels in providing timely access to services through increased productivity. This area of strength can be expanded to impact performance in Finances. Obviously, clinical staff are the stars of this organization.
Learning and Growth: Performing near its target, BCH has found ways to meaningfully use electronic medical records and link them to other organizations. This capacity should prove beneficial for lean workflows and reduced overhead in the near future.
Process: BCH chose to focus on timeliness of service as its process improvement. Lean value chain processes are in place, but the workforce is reduced by 18% due to hiring delays. BCH made the mistake to not include external stakeholders in its lean value engineering process, such as partnering with colleges to supply BCH with new job applicants. Therefore, while the process is working, it does not achieve the needed volume of service to keep consumers in outpatient services and avert inpatient admissions.
How did BCH create this Balanced Scorecard structure and what can BCH do to improve it further?
In general, to choose the right performance indicators for the Balanced Scorecard, managers must ask first:
The answers to these questions lead to a structure called management accounting. It combines financial and management decisions into one strategy.
In the example above, the organization is out of balance by 27.6%. What can the organization do to get closer to its target of zero balance? Several tools to strengthen each area are discussed below in detail. In addition, there are other examples available where the Balanced Scorecard approach has been tested and proven effective, such as this NIH study and the NY State Office of Mental Health Scorecard.
The Finance section of the Balanced Scorecard sums up the financial performance of the organization into one single score. Managers identify which performance areas to measure, decide which performance measures to use for each area, and add the scores for each. The average of the sum is the single “Actual” score. It is compared to the target. Ideally, three numbers, the Target, Actual and Balance (or difference between Target and Actual score) are reported to the Director each week. If the balance is off by more than five percent, managers prepare a report that provides a deep dive into the root causes of performance and identifies how the variance needs to be remedied:
Number of billable In-patient placement days / total inpatient days
Reduce In-patient Hospital Costs - Medi-Cal
Number of LOS on or below the target LOS
Reduce In-patient Hospital Costs - LOS
Number of minutes time-studied to reimbursable MAA compared to percentage of Medi-Cal beneficiaries
Maintain TCM / MAA eligible productivity rate encounters
Number of discharges minus number of readmissions) / number of high acuity placements
Reduce Placement Costs
Health and Behavioral Health Accounting is not intuitive: this is all the more a reason to demand that it meet the common sense test. Finance reports must include timely updates on assets, cash flow, deductibles, value for money in purchases, unit cost, turnaround-time, adverse and extenuating circumstances, and data security. In the Balanced Scorecard environment, financial accounting shifts to management accounting, because organizational internal processes need to be managed within the workflow as a whole. As a result, adequate revenue can be earned and claims denials minimized in time before settling costs with third party payers. Management accounting therefore includes cost analysis, unit cost management, benchmarking for best value, performance measures and the ability to pull meaningful data in real time. In addition, the interrelationships with other departments are critical for financial success: adequate hiring timelines operated by Human Resources, contracting for specialty services operated by the Purchasing Manager, monthly reports on eligible populations from Research and Planning, and the Director communicating these reports to the CEO and Board.
A portfolio analysis identifies product lines (i.e. service workflows) that are too expensive and need re-engineering. Portfolio mapping helps managers to develop the right service at the right cost. In particular, comparing and balancing criteria for placements in certain levels of acuity to the risk those placements pose to the safety of the consumer will bring about the right mix of internal staffing and contracted providers.
Balanced Scorecard measures for Portfolio Analysis could include:
In an effort to generate sufficient revenue to support the organization, managers balance pricing of managed care with value attributed reimbursement. Managers structure services to differentiate the different levels of acuity (i.e. need) that consumers require according to their wellness status. The outcome is an organizational matrix where managers invest in services that have clear consumer value and preference, while minimizing those services from the service mix that do not have the potential for differentiation. This change involves five key steps:
How do managers know they are making progress? They may use some of the following Balanced Scorecard measures for Revenue Generation:
The Right Service Line
Managers clearly define service delivery patterns and their outcomes to define cost of quality and break even points. This part of the dashboard should answer such questions as: What is the unit cost of service? What is the cost of a typical episode of care? How effective are programs and services in meeting the organization’s objectives? How effective are programs and services in meeting desired consumer outcomes? How are services reimbursed and what is the best reimbursement strategy to choose?
The Balanced Scorecard measures for creating the Right Service Line could include:
In a managed care environment, demand and risk based pricing allows providers to design the services with features and outcomes that are valued by customers.. This leads to a market-based, customer-focused pricing model. First, an analysis of current expenditures will show the “as-is” pricing model. Is it low-cost pricing where services are designed by cost factor only? Is it high quality where customers pay premium prices for high value products? Is it focused on the best value position where consumers and purchasers define quality and value and pay a higher cost? Is it focused on using the latest, most advanced (information) technology for clinical care? Does the Director assume an integrated position where the organization promotes better quality through a continuum of care through an integrated network of services. And, has the organization acquired a niche position where it has the market cornered through a special kind of insurance or service?
As a result of answering these questions, an activity-based costing methodology will lead to more effective reimbursement and reduced numbers of claims adjustments. This includes tracking of indirect cost increases justified by a tested cost allocation plan. Managers need to identify the break even points for each service line using the most effective pricing policy. It should require a detailed break even analysis following guidelines of Proposition 26. For a summary click here.
The results of the rate setting process for Behavioral Health Services are included in the annual cost report. In California, the cost report is due November 1st following the end of the fiscal year. This is best practice and can only be achieved when cost reporting is kept up to date during the rate setting year. For an example, click here.
If the organization contracts with external providers, their rate setting process must be managed as well, and changes to the cost reporting process must be communicated in a timely manner. Los Angeles County for instance provides contractors an information portal that is updated daily to communicate any changes to the rate setting and billing process.
Rate setting must be compared to and reconciled against claims payments monthly in order to capture any errors in rate setting before cost settlement occurs. A good overview of provider manuals for the State of California is available on the DHCS website for providers.
The Balanced Scorecard measures for being on target with Rate Setting could be:
Actual total cost of last two months plus projected cost of next two months divided by units of service.
Determine Target Cost
The Director sets a pricing policy with a focus on increasing performance efficiencies to keep prices down and competitive. Pricing policy is heavily influenced by performance improvement initiatives in the “Learning and Growth” area of the Balanced Scorecard. Once the pricing policy is set, target prices are identified for each quarter. They are then adjusted as soon as quarterly cost reports are available to avoid gaps between incurred cost and reimbursement. The break even formula is best used for this purpose (see below) and will keep staff aware of the costs incurred during operations. At the same time, levels of funding will fluctuate by funding stream and must be included in the break even analysis. In Behavioral Health, funding is fluid and dependent on new legislation introduced annually. An informative overview of the current funding streams for Behavioral Health Services can be found by clicking here.
The Balanced Scorecard measures for determining target cost could incclude:
Determine Break Even Targets
In order to balance the budget, managers must set break even points where net revenue and net expenditures balance. The formula for the break even point was mentioned before:
R - CD = E + ARC
The break even analysis determines how many billable patient encounters are needed in a given time frame to cover expenditures including reserve. All four disciplines of the organization must focus on maximizing billable encounters. It is important for organizational health and continued employee engagement to make the break even analysis a live document and a monthly report. Managers can be successful by cutting time frames for break even as short as possible (quarterly or monthly) and openly communicating the status updates to all employees. They will become mindful of the cost of their services. Break even points should be established for work units and by service intensity levels. The formula for break even targets is:
(Fixed costs divided by the average unit price) minus the variable cost per unit.
Determine which cost model to use
Cost models include fee-for-service, performance-based and capitated pricing arrangements. When managers consider a cost model, they often times choose price cutting as their best solution. However, this approach shortchanges the organization’s flexibility for growth. Instead, managers should consider a “no frills” service approach and a constant focus on driving down overhead costs by reducing administrative burden. Structuring the clinical service delivery model (group therapy, individual therapy, in-home services, psycho-education, assessment programs, case management or programs tiered by acuity) is the first step in promoting its advantages to customers. Cost models can include discounting, price point pricing (setting multiple price points for different quality of service products), transparent pricing (the price reflects actual cost of doing business), differential pricing (different prices for different services at different times), price bundling, and penetration pricing for hard to reach markets as well as prestige pricing (demonstrating that service quality is high in some product lines). A new development in healthcare features outcomes-based pricing, where results are guaranteed to the funder and recover a certain level of reimbursement.
Determine value of service
Value of service is defined by cost of service for each beneficiary compared to service outcome. Balanced Scorecard measures are listed in the Customer Care section. Value of service is a key measure that must be published and made available to customers annually, because it retains customers and offers information on the quality of services provided.
Developing case rates
Chief Financial Officers often set rates by including all beneficiaries into the rate pool without regard to acuity levels or funding streams. The law of averages dictates that all rates will be skewed toward the mean, veiling the peaks and valleys created by levels of acuity and payer. A good way to determine appropriate rates is to first determine the level of intensity for these services by counting the number of procedures needed for a patient in one day. The breakdown shows the number of service hours per day, number of staff hours and skill level of staff, as well as extraordinary services such as intensive case management for social services or discharge. Re-admission rates should be tracked for each patient and included in the rate for the acuity level from which the patient was discharged, because over-shortening services in one acuity level can lead to readmission on another level. The mean expenditure per beneficiary in each level and approximately one tenth of the first standard deviation from the mean determine the range that is admissible for rate setting.
In developing case rates, salaries, benefits, per diem coverage, overtime and shift differentials should be included in the cost pool as well as on-call coverage, home visitation mileage reimbursement, and education hours. Managers also estimate intensive case management service levels by including hours for case consultations and meetings. While forecasting the costs for the next two or twelve months, the Chief Financial Officer should delineate variable from fixed costs using predictive modeling based on trend analysis and reports describing how new regulations will change the cost reimbursement model.
Collections are often forgotten in financial calculations because they are hard to come by. An Accounts Receivable aging schedule can shed light on the volume of outstanding payments due to the organization, and oftentimes managers are surprised by its magnitude. Getting the front end right is the key to successful collections: Any information not collected at intake about insurance coverage and eligibility for services slows down the billing and collection process and often causes confusion that costs more in staff time than it is worth collecting from the client.
Centralized accountability for the data collection process is key to getting accurate information in a timely manner. Standardized forms and online collection can ease the information flow. Linking prescribed timelines to staff performance evaluation is a critical success factor of collections. Admissions staff typically verifies patient information through third parties before passing it on to billing staff. Questions to verify include: “Is the insurance coverage active and what is the effective date?” “What benefits are covered, what others are not?” “Is there a waiting period?” How are mental health benefits different from substance use treatment benefits?” Is there a deductible, how much is it, and is any of it met?” “Is there a co-pay for services, how much is it, and was it submitted?” “Is there a limit to authorized services?”
Once services are provided, the lag time between service delivery and data entry on services provided should not exceed 4 hours. Following data entry, Quality Assurance staff issues a “pre-billing” report that identifies potential billing errors and send the claims back to the originating clinician or the billing clerk one week prior to billing issuance. Corrections should occur within 48 hours. Managers review a weekly report listing claims errors and suspended claims by category of error, number of claims and total dollar amount. Before sending off the bill, suspended claims should amount to zero. Once payment has been received, reconciling each payment against invoice should occur within 72 hours. Similarly, collections from self-pay and sliding fee scale clients should occur at the time of the next appointment based on a written, well published policy that is made available to clients before any services are delivered. Next appointment contacts are also the right time to check and verify continuing insurance coverage and track any changes in insurance policy changes or service authorization.
Accurately tracking the process for billing is essential for meeting the mission for financial balance. More details are listed in the “Process” section.
Customer Care requires differentiation of diagnosis categories and levels of acuity. Necessarily, this results in building several different product lines: Peer service, Outpatient, Crisis Services, Urgent Care, Residential Detox, Intermediate Care Facilities, Institutes of Mental Disease, Psychiatric Health Facilities and various Hospital services. Product line management monitors and adjusts average costs per patient, length of stay, customer satisfaction, and maximum cost / reimbursement for each product line. Contracting healthcare providers are included in the cost estimates and chosen competitively.
Customer - Centered Organization
This type of organization focuses on meeting the needs of consumers, payers, purchasers and referring agencies. By knowing, creating and promoting value to these key stakeholders, a behavioral health organization can distinguish itself with excellence.
Determine value of service
Value of service is defined by cost of service for each beneficiary compared to service outcome. Service outcomes would be measured differently in private health plans than in public ones. For instance, private health plans use the Healthcare Effectiveness and Information Set (HEDIS), which includes weight management of participants, screening rates, aftercare rates and readmissions, call abandonment rates, etc.
In Behavioral Healthcare, measures are less standardized. The State reports access to care (penetration rates), responsiveness, and aftercare avoiding re-admission, etc. through a prescribed set of measures for Mental Health Plan Performance. However, consumer outcomes are less well defined. One of the best adult consumer outcome measures is used by the San Diego County Mental Health Plan. It focuses on the adult consumer’s increase in:
Comprehensive outcome measures were published in 2011 by the federal Substance Abuse and Mental Health Services Administration (SAMHSA). Its National Outcome Measures Domains include:
In addition, SAMHSA has developed system outcome measures for “Customer Care” using its Theory of Change model. Some of the more prevalent measures include:
Any of these outcome measures can be included as performance measures in the “Customer” area of the Balanced Scorecard.
How can agencies operationalize “getting to the target” of customer care? Bonus payments and penalties can be included internally for agency management as well as outside providers. Agreements with providers and Requests for Bids should provide an opportunity for providers to set thresholds and propose bonus (sanctions) for meeting (not meeting) value benchmarks such as:
To the extent that outcome measures are tracked and data used to provide feedback for clinicians in near real time, cost effectiveness will increase. As a result, purchasers of service (which includes the U.S. Congress and taxpayers) will be willing to increase resources for services. Overall, value increases when the cost per beneficiary is reduced and the variation in cost per beneficiary decreases.
Create consumer engagement
Publishing reports to managers on consumer demographics, segmentation for optimal service delivery locations, and the kinds of services consumers value helps managers to increase the quality of services provided and deploy resources to areas of differentiated services. Consumer engagement strategies include self service for appointment scheduling, hotlines for peer support and wearables for medication monitoring. Potential Balanced Scorecard measures include:
Design customer focused services
The health organization should be able to answer these questions before launching services: What service features are demanded by customers? What are their key measures for satisfaction and quality? What are the desired outcomes? The answers to these questions will build the “Voice of the Customer” which will be the single focus, end-to-end and enterprise-wide, of all services provided at any time. The suggested Balanced Scorecard measures include:
Learning and growth is the area where staff engagement drives productivity. What can executives do to get great ideas coming from the floor and how do they best communicate those to the management team? In exchange, what should staff know about changes in regulations, standards and the healthcare environment? What is the best method to communicate those? Taking these measures creates a fun-to-work-in learning environment where healthcare workers are viewed as a “community of scientists” and their supervisors as “teachers.”
Environmental scan and changes in laws and regulations
Leaders and Managers must decide whether the current reimbursement environment supports expansion of services and if yes, in what areas. Before making this decision, one must answer these questions:
Innovations must be focused to increase customer care and decrease costs. Experience shows that employee suggestions for small scale innovations are helpful to free up staff time while enterprise-wide information technology solutions can automate many manual steps in the healthcare system.
This area is the driver of all others. Its execution concludes whether the Balanced Scorecard approach is successful. At the same time, this is the area where most gains are made: six sigma lean management workflow studies show that a typical average organization can carry up to 32% in wasteful activities that can be identified and changed to be more efficient. Constant process analysis conducted with a Continuous Quality Improvement mindset can lead to a reduction of waste and increased productivity. Here are the main areas where process analysis should focus:
Accounts Receivable Management
The dashboard for managers should include weekly accounts receivable reports so that managers can control the financial balance as close to real time as possible and detect any error trends before they get out of hand. The reports should contain information about five key issues::
Management of Accounts Receivable should be part of the management team’s performance evaluation.
Most users of Electronic Medical Record Systems do not take advantage of all the billing editing features the software uses. Checking with the software company about the system’s capability can save hundreds of thousands of dollars. Management should inquire about:
Payer Table Files: These files include all the rules about each payer.
The following performance measures can be included in the Balanced Scorecard:
The most important ingredient: Service delivery profile
The dashboard should include reports that show the organization’s pattern of delivering services, length of stay by level of acuity, mix of services by diagnostic category and acuity, as well as use of emergency medications, and emergency services leading to higher levels of care. The Balanced Scorecard measures are complex in this area and depend on the systems available to communities. Therefore, an in-depth customized analysis is needed to determine the optimal service delivery profile.
Analysis must include elements of performance. Without doubt, Joint Commission structured workflows have proven to be most effective for healthcare solutions. These include ambulatory care, critical access hospital management, hospital services, behavioral healthcare, and lab services. Communicating and monitoring staff’s execution of the elements of performance is the key to success to all healthcare systems. In this effort, a Just Culture approach has been most beneficial: executives make an a priori determination that errors occur mostly through system design and encourage staff to report all mistakes so that their reports can be included in a Continuous Quality Improvement Initiative. The University of Arizona Health Sciences Department of Medicine is a leader in this movement and has summarized the Just Culture algorithm in one picture: