Quantifying the impact of COVID-19 on your organization

by Pietro Ferrara

In times when many hospitals and health systems will face negative margins, employing activity-based costing principles that support a value-based healthcare economy provides essential information for healthcare leaders. Using this method to understand expenses associated with providing care exposes process inefficiencies, as well as capacity, across your value cycle. This is information that will help future-proof your organization.

Breaking down a complex problem

As hospitals brace for and emerge from peak impact of COVID-19 on their communities, leaders must be prepared to handle an unprecedented change across their financial statements.

Begin by categorizing your patient population by medical condition and relative volumes as well as distinguishing between elective (E) and non-elective (non-E) procedures/services for each category. For each new grouping of medical conditions (E and non-E), it is necessary to understand expected volume case-mix variance through reviewing historical data.

Additionally, analyzing the variance of relative expenses—direct versus indirect—illuminates what can potentially flex down and up.

Lastly, from a resource consumption and cost perspective, consider the inherent flexibility within employee skillsets.

Use the following actions by category to project the effect on revenue, cost, and overall profitability of your hospital:

• Volume case mix. In some cases, a general decrease of volume was expected; in others, a significant change in the case mix, particularly in regions that have experienced the full impact COVID-19 spread, has been realized. Actions to consider include:
  
  • Qualify and quantify the volume case mix variance in order to identify the medical condition/specialty
  • Analyze the financial impact of what has been cancelled versus what is new in the volume case mix
• Facility / supplies / equipment investments. Provided supply vendors do not subscribe to demand/offer gaming, the overall financial impact of the supply category should not be significant. Nevertheless, actions to consider include:
  
  • Qualify and quantify the unplanned investments in order to clearly identify facility investments, equipment, supplies, and other related expenses
  • Analyze overall financial impact
• Labor resource variation. With the change in volume case mix and a noticeable variation in surgical cases, a relevant portion of procedural staff has likely been temporarily reassigned to other care areas. Actions to consider include:
  • Qualify and quantify the unplanned shift of activities and analyze impact on staff. Develop a thoughtful and thorough staffing plan to support the crisis as soon as possible.
  • Analyze overall financial impact.
• Patient revenue shift. The average reimbursement by case has dropped. To preserve the bottom line, compensation with some other revenue, like public funding or pass-thru, has become imperative. Actions to consider include:
  
  • Qualify and quantify the unplanned revenue mix shift across all payers and respective contracts, as well as the overall variance from expenses
  • Analyze financial impact by payer

Bottom line

Resource consumption at a patient level, comparing related losses with reimbursement and expenses, is key to understanding the impact of the COVID-19 pandemic.

Editor’s Note: Ferrara is the senior vice president of margin & operational intelligence for Craneware Healthcare Intelligence® in Pittsburgh, Pennsylvania.. He can be reached at CHI@craneware.com.