This is the third post in a series where I’ll be documenting an achievement from my time at Munson Healthcare. Our team created a system-wide patient-level profitability model that leveled up our understanding of the business in a big way.

If you think of patient-level profitability reporting as a ‘finance tool’, you are missing the point

At the most basic level, a patient-level profitability model takes the revenues and costs from the entire hospital and assigns a little bit to each patient. Anything that uses the words ‘revenue’ and ‘cost’ MUST be a finance tool, right?


As it turns out, when you understand financial performance at the patient level, you’re opening the door to all kinds of insights. When we built our patient-level profitability model, here are two things we learned that were interesting even to non-financial types.

1. The cost of a ‘staff perk’

One day, our surgical services administration looked at the patient-level profitability model and saw bypass surgery reimbursement was down almost 15%, but volume was flat.

We did roughly the same number of surgeries, but we got paid less. What was going on?

Predictably, they looked at payer mix first. We must have gotten an influx of Medicaid cases recently.

Wrong. We’d actually had FEWER Medicaid cases than the prior year.

Next, they looked for outlier cases. We must have had an outlier case in the prior year with exceptionally high reimbursement.

Wrong. We were getting standard DRG payments all along.

DRG payments?

DRG payments were the key.

What drives a DRG payment? The presence (or absence) of ‘Major Complications and Comorbidities’ (MCC’s). In fact, the difference between a bypass surgery with and without MCC’s was about $13,000 per case. Our surgical services administration found that — this year — there were curiously few patients with MCC’s.

What happened? Did the patients suddenly get healthier?

As it turned out, the patients didn’t get healthier — their documentation got healthier. And why was that?

For the last few years, there had been an RN stationed on the cardiac surgery floor. That RN was responsible for clinical documentation. (“Doctor, from your notes, it looks like this patient has diabetes. Can you confirm? I’ll add it to the medical record.”)

This year, the clinical documentation RN had negotiated a remote work agreement. Instead of being at the bedside, this RN could potentially work poolside, or pyramid-side…

Theoretically, there should have been no difference between the RN working remotely or co-located. By hospital policy, providers were required to respond to clinical documentation queries, or risk being stripped of privileges. Remote vs. on-site shouldn’t have even been a question because the results should have been the same.

In practice, however, the difference was HUGE.

We actually did the math to calculate the marginal loss of reimbursement per case due to lower DRG mix. Here’s what we found:

We were losing an average of $1,800 per case when we did a cardiac cath, and $5,600 per case when we weren’t. Multiply that number by one of the most active CABG programs in the state, and we’re talking about real money!

This was supposed to be a great success story of workplace flexibility. It was supposed to be a shining example of a hospital competing for top-class talent by offering solid perks. The reality could not have been more different.

Instead of giving ourselves a pat on the back for workplace modernization, we had two highly unpleasant choices:

  • Rescind the remote work agreement and ask the RN to come back on-site
  • Hire yet another full time employee to do the job (yes, the gap was THAT big).

What would you have done?

We did acknowledge one silver lining, after all this. At least we had the information to ask the right question! We would never have even discovered this problem if the general ledger were our only source for financial information. ‘Bypass surgery’ is not a department, after all.

We got burned trying to give an employee a perk, but at the end of the day we course-corrected before the damage cost someone their job.

2. We DO get paid for readmissions

My finance friends will roll their eyes at this story. ‘Of COURSE we get paid for readmissions’.

What you may not know is that ‘we don’t get paid for readmissions’ is a common misconception among people who work in patient care and clinical quality.

How could people spread a rumor like that?

My guess: when the Affordable Care Act was passed, the CMS readmissions penalty was hot news. Somewhere in the game of telephone that followed the ACA’s passing, we lost the real message (If your readmission rate is worse than average, you’ll lose a small percentage of your Medicare reimbursement) in favor of the patently-false-but-attractively-simple alternative (you get paid for the initial encounter, but not the readmission).

I wasn’t surprised that people (in general) were confused by how hospitals get paid. Reimbursement is complicated. What surprised me is is WHO was confused. People who comfortably made triple my salary at the time STILL erroneously believed ‘we don’t get paid for readmissions’.

Because the people confused about this had such high-level roles, it was actually pretty difficult to debunk the ‘no pay for readmits’ fallacy. Imagine:

Executive: “And everybody knows we don’t get paid for readmissions…” (Heads nod dutifully around the room.)

Skinny nerd: “Actually, we do get paid for readmissions, sir.”

Executive: “Right. Anyway, we have to cut down on readmissions. This is mission critical, people!”

Anyone who came to my fictitious meeting just now got their belief that ‘we don’t get paid for readmissions’ reinforced! They just heard an executive say the words out loud. Thanks to confirmation bias their brains will only remember what the executive said and will conveniently forget the skinny nerd’s interjection.

How did we combat the problem of the patently-false-but-attractively-simple narrative? With some oversimplification of our own. Thanks to our patient-level profitability model, we could isolate the reimbursement (and cost) of readmitted patients.

We kept refining the analysis, refining the message until it was brutally, painfully simple.

  • Crude? Yes.
  • Inaccurate? Yes.
  • Effective? We’d find out soon enough.

We had our number. We had our story. When did we decide to pounce?

Annual budget season! The time when everyone is already mentally prepared for financial realities.

We knew three things about the annual budgeting process:

  1. Every department has pet projects they want funding for
  2. All managers know they need to find money to pay for their pet projects
  3. People across the system will have the bright idea of saying ‘this project will reduce readmissions, so it pays for itself!’

As the entire healthcare system was preparing for the song-and-dance of budget season, we prepared a presentation to the Quality and Safety executives with the purpose of helping them set an appropriate target for next year’s readmissions.

To help us deliver the message, we enlisted the help of an enterprising physician — probably the physician who knew the most about insurance rules. This doctor had a reputation around the hospital as a fierce advocate for patients (not for margins). We knew the message would be powerful coming from him.

For the executives in the room, this was NOT the direction they expected his presentation to go.

“We don’t want patients to come back to the hospital. A return either means there was a breakdown in care OR a really sick patient. That said, you can’t ignore the financial aspect of readmissions. Every readmission makes us $10,000 in reimbursement. If we cut readmissions to zero, we’d lose out on tens of millions of dollars.

“Do what’s right for patients and set a goal to reduce readmissions. But don’t kid yourselves. Readmission reduction is directly at odds with your financial KPIs. Set a goal you can afford to meet.”

Needless to say, the doctor got some incredulous looks from the executive team at the end of his presentation. But the executives were abuzz with this “new” idea (that reducing readmissions was not necessarily a win-win for everybody). And being in the thick of budget season, they were now primed to be on the lookout for ‘money-saving’ proposals having to do with readmissions. Our strategy worked!

Again, my finance friends can roll their eyes all they want. Because we built our patient-level profitability model, we could zoom in on the financial performance of ANY subset of patients (and do it quickly). When we zoomed in on readmissions, we debunked a common misconception and refocused the conversation on our organization’s actual goals.

What would YOU do?

If you could zoom in on any patient population, what would you want to find out? It’s not all about money. It’s more that following the money helps us find opportunities we never knew we had.

Since you made it this far…