Interfaces Journal Article Summaries: Contract Optimization at Texas Children’s Hospital

Contract Optimization at Texas Children’s Hospital

Synopsis of the problem

In the late nineteen nineties, Texas Children’s Hospital found itself facing financial challenges. A number of factors contributed to these circumstances including; decreased government-payor refunds, high risk contracts, and increase in patient needs. As a non-traditional business, hospitals provide a variety of services, with a primary objective to save lives and not one of profit maximization. However, secure revenue streams are crucial for continuous operations. This type of business necessitates a revenue optimization approach that takes into account the business requirements of a healthcare institution. The president and chief executive officer of Texas Children’s Hospital, Mr. Mark A. Wallace, opted to address these issues through pricing and revenue management optimization implementation by partnering with PROS Revenue Management.

One of the complexities of the healthcare system, is how it generates revenue. Hospitals such as Texas Children’s Hospital, provide a variety of services and generate revenue mainly from federal funded services such as Medicare, Medicaid, a number of additional public programs, and private commercial insurers. Although private commercial insurers only represent less than fifty percent of healthcare expenditures, they provide the greatest revenue leverage opportunities. This is due to the ability a hospital has to negotiate contracts terms with its private insurers or payors. Since hospitals can hold a large number of contacts, and each contact secures patient influx. However, contracts do not exemplify an agreement with the insurer for specific volume of patients or any assurance on payments, but it establishes the reimbursement rates for services rendered. As a result, insurers may lead patents to opt for the least expensive healthcare services, which in turns leads healthcare providers to promote services to increase their market share through different channels.

The issues arising from the revenue stream configurations of hospitals, increase in complexity as different negotiations evolve out of diverse premises with insurers. This study further addresses problematic areas dealing with contacts, reimbursements and risk. For example, insurers take risk just by offering services under a benefit plans and specific premiums are set. Since these premiums are established based on historical data of patients, when these estimates are not accurate, and expected claims surpass premiums, the private or government insurer exhaust capital. Another example is by means of charge-based reimbursement methods, where insurers do not pay standard rates, but negotiate rates, recognized as “discount off charges”. The main risk associated with “discount off charges” is in how the overall cost are estimated, especially fixed cost.