As Cleverley and Cleverley (2018) suggest,
The critical driver of any firm’s financial solvency is usually its ability to generate reasonable levels of profit that can provide for the replacement and growth of capital in the firm. Because profit is simply the difference between revenue and cost, careful attention must be directed at both revenue management and cost control. (p.168)
you are the Chief Financial Officer (CFO) for Shady Valley’s 80-bed skilled nursing facility for long-term care. You are meeting with the healthcare organization’s Chief Executive Officer (CEO) this week to discuss the need to control revenue and factors that influence pricing.
The CEO requests your thoughts concerning these topics. You must also provide cited content to back up/validate your thoughts and suggestions.
Explain three major ways healthcare providers can control their revenue function.
Define how market structure and capital intensity can influence pricing.
Discuss how a healthcare organization’s financial information justifies healthcare firm prices.
Outline the importance of health plan contract negotiation for revenue management and budgeting purposes.
The Revenue Determination and Pricing paper,
Optimizing the Revenue Cycle: The revenue cycle encompasses all administrative and clinical functions that contribute to the capture, management, and collection of patient service revenue. Control here means ensuring accurate and timely coding, efficient billing processes, and effective collections. By minimizing claim denials and reducing the time it takes to receive payments, we can improve cash flow and increase total revenue.
Strategic Service Mix: Controlling revenue isn't just about volume; it's also about the mix of services provided. We can analyze the profitability of different services and focus on those with higher margins, such as specialized rehabilitation programs or memory care units. This helps us ensure we are providing a mix of services that is both clinically effective and financially sustainable.
Market Structure and Capital Intensity in Pricing 📊
Market Structure: The structure of the local market significantly influences our pricing power. If Shady Valley operates in a competitive market with many other skilled nursing facilities, we will have limited pricing power. Our prices will likely be determined by what our competitors charge, and we'll need to focus on cost control to maintain profitability. In a less competitive, or oligopolistic, market with only a few providers, we would have more flexibility in setting our prices.
Capital Intensity: This refers to the amount of capital required to produce a good or service. Skilled nursing facilities are capital-intensive due to the high cost of buildings, medical equipment, and technology. This high capital intensity necessitates higher prices to cover fixed costs and generate a return on investment. If we need to invest in a new wing or expensive medical equipment, our prices must reflect that investment.
Financial Information and Pricing Justification 📈
A healthcare organization's financial information is the primary justification for its prices. It allows us to demonstrate that our pricing is necessary to cover costs and maintain a viable operation.
Cost Data: Our detailed cost information—including labor, supplies, and overhead—shows that prices are set to ensure the organization can cover its expenses. This is essential for negotiating with health plans and justifying rate increases.
Profitability Analysis: We can use profitability analysis to justify prices by showing that they allow the company to reinvest in facilities, upgrade equipment, and attract and retain skilled staff. Without reasonable profits, a firm cannot replace and grow its capital, which ultimately harms the quality of care.
Sample Answer
Revenue and Pricing Control for Shady Valley Skilled Nursing Facility
As the CFO of Shady Valley, I've prepared an analysis on revenue and pricing control for our upcoming meeting, supported by key financial principles.
Controlling Revenue Function 💸
Healthcare providers can control their revenue through three major strategies:
Patient Volume Management: A fundamental way to control revenue is by managing the number of patients and the services they receive. This involves attracting new patients through marketing, improving patient retention through quality care, and optimizing scheduling to reduce no-shows. For a skilled nursing facility, this means maintaining high occupancy rates and ensuring a steady stream of referrals from hospitals and other care providers.