iCentrix Corp. - Financial Challenges in the Era of Health Care Reform
iCentrix Corp.

The increasing cost of health care and the associated health care reform are driving changes to the way organizations are getting paid for their services. Finance departments and program directors are increasingly being challenged to respond to entirely new program structures and payment types, as states, counties, managed care organizations and other payors change the way they allocate service demands to providers. Where one payor in one region might be switching from a capitated model to a fee-for-service model, other regions are moving in the opposite direction. Increasingly, payors are setting up programs where providers are paid for performance, including clinical performance measures as well as client outcomes.

Finance departments and program directors find themselves struggling to catch up, as the new payment models require a different understanding of the organizations cost structures or revenue requirements than was previously needed. We are seeing greater numbers of requests by organizations for tools that help them prepare for bids on new types of programs, or help them make the argument to their payors for the rates that they need to sustain their services.

One example of such a tool is a unit cost of service model. Organizations that have adopted these tools develop a cost allocation strategy that allows them to measure cost at the level of the individual service (event). These tools complete the picture needed for analyzing profitability, providing the other side of the equation needed to balance revenue. They find that their existing cost-center-based expense structures are often inadequate for meeting the needs of bidding on new program types or grants, because the new services are often structured in a different way from their cost center structures.



Allocating costs to the unit level allows organizations to roll up costs in a variety of different ways than was previously possible, allowing them to isolate pockets of poor profitability as well as allowing them to gain a historical perspective of cost needed to bid on new program types effectively. An example of this is shown in the figure below.

When costs are allocated to the unit level, cost versus revenue can be analyzed by any type of grouping, such as by service type, project code, or even client diagnosis. Many organizations are now adopting tools such as these to prepare for the new types of programs that are emerging in today’s healthcare environment.

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