Milliman MedInsight publishes this blog as a forum for meaningful discussion of day to day use of healthcare data to address issues and challenges encountered by healthcare organizations. Our consultants offer their expertise on innovative approaches and processes to leverage data to identify root causes of changes in cost and utilization trend, clinical and quality initiatives, and more.
The following list highlights MedInsight’s top 5 blogs in 2013 based on total page views:
5. David Mirkin’s blog “Innovation in Heath Plan Medical Management Metrics” explores the characteristics an idea medical management ROI tool or tools would have.
4. The concurrent and prospective models of risk adjustment both offer different advantages. Barb Ward breaks down each type in her blog “Risk Adjustment and Provider Profiling – My Patients are Sicker.”
3. Individual and small group health insurance markets went through a dramatic change in 2013 driven by the exchange. Andrew Naugle highlights why monitoring administrative expenses through benchmarking is essential in his blog “The Importance of Administrative Cost Benchmarking.”
2. In his blog “Employer Group Reporting: Just checking the box or true data analytics,” Brian Studebaker answers these important questions: what do employer groups really want from employer group reporting and what do employers really do with these reports?
1. Al Prysunka provides insight for APCDs on the utilization of an EDI format in his blog “Implementing the PACDR Guides for APCD’s – EDI vs. ASCII.”
Over the last few years one day hospital stays have been a focal point for medical management efforts to convert these to observation stays. In addition the 2014 Medicare’s Inpatient Prospective Payment System’s final rule on inpatient admission defines an “appropriate” inpatient admission as one that in the judgment of the admitting physician requires a hospital stay of at least two midnights or in medical management terms, a two day length of stay (LOS). Patients not meeting this criteria but needing inpatient hospital care lasting past one midnight but less than two will be classified as observation cases. The combination of these and other factors is leading to an increase in utilization for observation. So is this a positive outcome from a cost management perspective or is it problematic? This is becoming an important question for population management and one that does not have a simple answer.
A not uncommon situation is one where the reimbursement levels for inpatient hospital admissions and observation stays are not rationale. By this I mean that observations stays are paid more than if the patient were admitted as a regular inpatient admission. Avoiding an admission through the use of observation may be the right thing to do in this situation from a resource efficiency perspective but may actually cost a payer more than the hospital admission that is being avoided. Regardless, the overall trend is to move patients to observation status when this is appropriate clinically.
So how should observation status utilization be measured and what benchmarks should be used to monitor results? If we see an increase in observation utilization is it a desired outcome or should we be concerned? The typical practice of measuring billed units may not be the best approach since observation stays are billed using different units depending on how payer hospital contracts are designed so some observation services may be billed in hourly increments in some settings, in 24 hour increments in others and as a generic per observation episode in others. Our recommendation is to use “observation episodes” as the unit for measuring utilization. An observation episode is measured using the same logic as an inpatient stay, each midnight occurring during an observation stay counts as 1 observation unit with a minimum value of 1 for observation stay not spanning midnight. As examples, an observation stay starting at 4 AM and ending at 8 PM would be 1 observation unit, a stay starting at 4 AM and ending at 1 AM would also be 1 observation unit and finally a stay starting at 4 AM and ending at 1 AM after two midnight would be 2 observation units. This allows us to directly compare observation unit utilization with inpatient hospital utilization and one goal for directing patients towards observation is to reduce inpatient utilization.
Now for the question of how do we determine if our rate for observation utilization is positive or a problem we need to address. Since observation is a substitute for short stay hospital admissions we need to look both at observation utilization and short stay hospital utilization. We recommend combining observation episode with 1 day LOS hospital admissions to produce a combined utilization rate and then comparing this to either a historical target or a benchmark from a source such as Milliman. An example taken from a Milliman analytic tool (MedInsight Guideline Analytics) is shown below.
Using this example the target utilization is the “combined Obs + 1 Day LOS” or 27.7/1000. Our actual is 28.3 or a bit higher than we would like. In addition, our 1 Day LOS utilization is higher than the benchmark while our Obs utilization is less meaning we should have opportunity to shift more 1 day admits cases to Obs without causes excess utilization.
As we are all aware, the Affordable Care Act contained specific regulations that govern payers’ Medical Loss Ratio or MLR. These rules set minimums for the amount of the premium dollar that plans must spend on benefits. If we think of a premium as having three components: Benefits, Administrative cost, and profit or surplus, by setting a minimum for the size of the benefit component, the ACA essentially set maximums for administrative expense and profit.
These restrictions created new pressure for plans to manage their administrative expense as this is the primary opportunity for increasing profit or surplus. In reality, changing a payer’s administrative cost structure can be a challenge: It takes a disciplined approach; it may actually require increased spending through investments in technology and other efficiency improvements; and it doesn’t happen overnight.
Regardless of these challenges, organizations must find ways to manage their administrative expenses. To help organizations, we have identified five best practice approaches that organizations can use to support this work.
- Develop a defensible and accurate way to allocate administrative costs. Organizations must ensure that they are appropriately allocating administrative costs among lines of business. Not all product lines are subject to MLR reporting requirements, and thus it is important to ensure that costs are appropriately allocated to the right products based on cost-generating activities. Best practice organizations use a cost allocation model that uses quantifiable data to allocate costs and generate line of business financial reports.
- Employ an enterprise effort. Administrative cost management isn’t just finance’s problem—it requires an enterprise focus from managers and front-line staff throughout the organization. Efficiency improvements can come from anywhere within the organization. Any administrative cost management project requires leadership and stakeholder engagement, organizational understanding and buy-in, and transparency.
- Use benchmarking to set targets and understand what is possible. Benchmarking helps organizations understand how their own costs and performance stack up against the competition. Use of benchmarks can help identify opportunities for process or organizational renovation, estimate the potential savings from specific initiatives based on efficiency improvements, or even identify areas where additional investment is appropriate.
- Track and trend improvements over time. At the beginning of any cost management project, leadership should establish targets (benchmarks can give targets credibility). These targets should include both the overall goals (e.g., departmental administrative cost levels) as well as metrics related to drivers of cost reduction (e.g., efficiency, production, and quality). Over the course of the project, the organization should monitor changes and report progress so that participants can see progress being made. Best practice organizations use systems and tools such as dashboards, to report information throughout the organization.
- Ensure incentives are aligned to achieve desired outcomes. Many organizations recognize that what gets rewarded is what gets done. Incentive alignment strategies include: using benchmark data to set annual operating budgets; empowering cost center managers to negotiate trade-offs within benchmark budget targets; and tying budget performance into incentive compensation.
Administrative cost pressure is a reality for all payers. These five best practice approaches can provide the foundation on which organizations can more effectively manage their administrative performance and achieve long-term goals for organizational success.
To learn more about administrative cost and MLR, click the following link to access our most recent webinar: Managing the Other Side of the Medical Loss Ratio.