Revenue management is an important aspect of functioning in any institution. Like any other business, healthcare organizations have to perform effective revenue management in order to maintain stable financial status and avoid critical losses. A revenue management system in the healthcare sector is particularly complicated since the organizations cooperate with both federal and private bodies. As such, the paper at hand aims to provide a complex review of the healthcare revenue system, analyzing the key revenue sources, the procedure of rate negotiation, and the main challenges associated with the implementation of improved revenue models.
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Health care organizations operate within a specific market environment. As such, their revenue sources are slightly different from the traditional sources that other businesses use. Generally speaking, the main revenue source in the healthcare sector is the so-called operating revenue. In other words, it is the money that hospitals receive for providing their services. As a rule, this revenue comes from two principal sources: public and private. Public revenue sources refer to two types of support options that the governmental offers to the medical sector. To date, these support options are Medicare and Medicaid. The former is an insurance that provides coverage for individuals aged 65 years old and above. It likewise provides coverage for mentally and physically disabled groups. The financial basis that supports this insurance is the taxes collected from the working population. The latter option is an insurance that covers low-income groups or those individuals that have severe or chronic medical conditions. The financial basis that supports this insurance is likewise the taxes collected both at the governmental and federal levels.
Private revenue sources, in their turn, are composed of private payers or clients, and private organizations. As such, clients are a stable revenue source as long as they cover the expenses of their medical care without involving a third party. Private organizations are such institutions as Health Maintenance Organizations and Preferred Provider Organizations. In the frame of private revenue sources, hospitals might likewise account for donations and grants provided either by individuals or private companies. In the meantime, this revenue source is highly unstable and unpredictable – in order to receive this type of financial support, hospitals need to perform effective lobbying activity within the local community. Kerlin and Polak (2011) also point out such revenue source as nonprofit commercial revenue that they consider to be a convenient alternative to donations and grants.
The process of rate negotiation plays an important role in revenue management. Thus, healthcare organizations need to ensure that the rates set by the key stakeholders are sufficient to cover the expenses they bear while providing clients with the relevant medical services. Unlike other businesses, healthcare organizations do not have many opportunities to influence the cost rate process (Kongstvedt, 2012).
Generally speaking, payment rates that are defined for every particular service can be of two types: negotiable and non-negotiable. Negotiable are those rates that can be lowered or raised to meet the demand of one of the stakeholders. Thus, for instance, private insurance companies normally discuss the rates that would suit both the sides. It is important to note that those healthcare organizations that have a certain competitive advantage such as a unique service or a convenient location are more likely to negotiate beneficial rates than those that do not offer any specific advantages (Berenson, Ginsburg, Christianson, & Yee, 2012).
Non-negotiable rates are those that are set by the relevant administrative rules. Thus, for instance, hospitals cannot account for lowering or raising the rates imposed by Medicaid or Medicare. From the financial perspective, non-negotiable rates are unprofitable for healthcare organizations. As such, practice shows that Medicaid and Medicare rates are too low to cover the real cost of medical services that patients receive. Likewise, health care organizations cannot negotiate the rates of the donations and grants provided by private companies or individuals (Berenson et al., 2012).
Therefore, the only alternative hospitals can use to ensure a stable financial status is to negotiate beneficial rates from private insurance companies and guarantee, in such a manner, that the revenues will cover the losses they bear due to the lowered rates set by Medicaid and Medicare. Ridic, Gleason, and Ridic (2012) suggest that healthcare organizations should gradually shift to self-regulating models, while the government should release its pressure in terms of rate negotiation.
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Challenges of Changing Models in Managing and Forecasting Revenues
As well as any other businesses, healthcare organizations have to adapt to the market environment and reshape their revenue models in response to the new options and emerging challenges. In the meantime, the reformation of the revenue management system or the implementation of a new revenue model is associated with a series of challenges.
As such, Spence (2015) notes that the best alternative to ensure effective revenue management and forecasting resides in the implementation of the line-based planning. This model offers a complex approach to managing and accessing the revenue scope. In the meantime, the expert points out that the key barrier that does not allow healthcare organization to adopt this line-based model is the lack of the relevant data. As such, most healthcare organizations do not have the relevant tools to ensure consistent accountability.
Additionally, most experts agree upon the point that the main challenge associated with the change of the payment models is to establish such a system that would encourage a shift to the quality-based payments. Current payment models imply a volume-based focus that has a negative effect on healthcare providers’ motivation (Mayes, 2011). Finally, Delisle (2013) points out such challenge as the need for maintaining the balance between clients’ demands and the service capacity. In other words, healthcare providers are highly pressed to deliver timely and effective services since the cost of care generally rises. As such, the expert suggests that healthcare organization adopt a new model that will allow reducing costs and improving patient outcomes.
The analysis of the revenue management system in the healthcare sector has shown that it has a lot in common with other businesses operating in the modern market. As such, healthcare organizations equally rely on both private and public revenue sources. Additionally, they are occasionally supported by grants and donations provided by private companies or individuals. The most challenging part seems to be the process of rate negotiation. From this perspective, healthcare organizations are limited to negotiating rates only with private insurance companies, while other stakeholders, such as public organizations, impose their own rates that are non-negotiable. Since the market environment is constantly challenging, it seems to be inevitable that healthcare organizations will have to reshape their revenue models in response to the emerging challenges.
Delisle, D. R. (2013). Big things come in bundled packages: Implications of bundled payment systems in health care reimbursement reform. American Journal of Medical Quality, 28(4), 339-344.
Kerlin, J. A., & Pollak, T. H. (2011). Nonprofit commercial revenue: A replacement for declining government grants and private contributions? American Review of Public Administration, 41(6), 686-704.
Kongstvedt, P. R. (2012). Essentials of managed health care. New York, NY: Jones & Bartlett Publishers.
Mayes, R. (2011). Moving (realistically) from volume-based to value-based health care payment in the USA: starting with Medicare payment policy. Journal of Health Services Research & Policy, 16(4), 249-251.
Ridic, G., Gleason, S., & Ridic, O. (2015). Comparisons of health care systems in the United States, Germany and Canada. Materia Socio Medica, 24(2), 112-120.
Spence, J. (2015, May 29). New complexities require a new approach to budgeting and forecasting. Healthcare Finance. Web.