Net Revenue per Adjusted Discharge Continues to Drive Success

Abstract

I visit approximately 80 healthcare systems per year. Many of systems have been touted as models for the future. As a strategic adviser with a particular interest the intricacies of physician engagement and managed care negotiations, I have been privy to confidential information that has led me to conclude that highperforming model health systems have one common, essential element: exceptionally high net revenue per adjusted discharge driven by high managed care rates. In addition to the confidential, proprietary data I have collected over the years, public reports support my hypothesis that high commercial rates are the essential component driving the ability of a health system to achieve consistently strong financial performance.Without high commercial reimbursement rates, health systems will not have the dollars necessary to fund innovation; successfully employ a large group of physicians; develop a high-functioning, clinically integrated network; and gain national recognition for excellence care delivery.SIGNIFICANT VARIATIONS IN MANAGED CARE RATESHealthLeaders Media (2009) reported that, 2008, the most profitable hospitals gained their financial advantage primarily from revenue generation - a function of high negotiated commercial rates and a large proportion of nongovernment patients - not from cost-cutting or efficiency. The top quartile of the most profitable hospitals reported a case-mix-index-adjusted net operating revenue per discharge that was $854 higher than for hospitals the bottom quartile ($8,924 vs. $8,070). However, the expense differential per discharge between the high and low financial performers was only $316 ($8,018 for the top quartile vs. $8,334 for the bottom quartile).The data suggest that the variation negotiated payer rates is not related to superior quality or service but rather is a function of clout. The 2011 Examination of Care Cost Trends and Cost Drivers report, released by the Massachusetts attorney general's office, notes (Office of Attorney General, 2011, p. 15):The difference prices each major health insurer pays to its lowest paid physician groups versus its highest paid physician groups exceeds 145%, and for two health insurers, exceeds 230%. Similarly, the difference payments made to the lowest paid versus highest paid hospital each major health insurer's network exceeds 170%, and for two health insurers, exceeds 300%.The report concludes that these wide disparities prices are not explained by differences quality, complexity of services, or other characteristics that might justify variations prices paid to (Office of Attorney General, 2011, p. 2).In its National Institute for Care Reform research brief Health Status and Hospital Prices Key to Regional Variation Private Care Spending, the Center for Studying System Change (2012) examined data on healthcare spending variation for UAW (United Auto Workers) union members and their dependents 19 markets. Spending per enrollee varied twofold ($4,500 vs. $9,000) communities studied even though benefits were identical. The researchers concluded that the wide range prices negotiated with hospitals explains a large share of the regional spending variation. For example, Akron, Ohio, the study reports the UAWs negotiated rates for hospital inpatient were 1 45 percent of Medicare; negotiated rates for emergency department were 169 percent of Medicare. In Cleveland, the UAW reportedly paid hospitals 30 percent more for the same provided Akron. This variation has led providers Akron to wonder whether, to maintain competitive premiums, health plans are being forced to suppress the rates for Ohio hospitals that carry little negotiating clout so that they may accept the higher rates demanded by hospitals with strong market power Cleveland.The high variation negotiated rates is further documented a second research brief by the Center for Studying System Change, which it concludes that in extreme cases, some hospitals command almost five times what Medicare pays for inpatient and more than seven times what Medicare pays for outpatient services (Ginsburg, 2010, p. …