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Improving the hospital operating margin (i.e., the percentage of revenue that’s left after accounting for operating expenses) is among the top three organizational priorities for 78% of today’s healthcare finance leaders, and although industry margins bounced back this year, providers continue to struggle with operational difficulties. In fact, 46% of hospital chief financial officers (CFO) recently reported negative or flat margins largely due to higher labor costs, lower reimbursement from payers, and higher supply costs.
Improving a hospital's operating margin:
The good news is, there are many ways to improve the operating margin, and revenue cycle management (RCM) teams, as well as patient call centers can help. Consider the following eight strategies:
1. Outsource billing and coding. Focus on costly and complex specialties such as behavioral health, nephrology, and wound care that the American Hospital Association (AHA) says are severely under-reimbursed. For example, in 2023, average payments for inpatient behavioral health services were 34.3% below costs across all payers. Average payments for nephrology services were 34.1% below costs, and in the outpatient setting, average payments for costly burn and wound services were 42.9% below costs across all payers.
Leveraging economies of scale associated with RCM outsourcing helps hospitals contain costs and improve operating margins particularly for these service lines. Another benefit of RCM outsourcing is that many companies provide access to specialty-specific medical coders who also have experience coding a variety of other complex specialties such as gastroenterology, orthopedic surgery, plastic surgery, oncology, cardiology, and others. This specialized knowledge and expertise helps reduce claim denials and payment delays that increase the overall cost of doing business. Not surprisingly, about a quarter of health systems are exploring outsourcing—including offshore options—as a mechanism to reduce costs.
2. Speed up prior authorization. A 2021 study estimates hospitals spend $10 billion annually on insurer prior authorizations. The annual cost per full-time physician? As much as $3,430. Finding ways to expedite this process (e.g., tasking RCM staff members to stay on top of prior authorization changes, creating alerts in the electronic health record when prior authorizations are absent, and working with payers to automate approvals for certain procedures) lowers costs and improves hospital operating margins. Focusing on Medicare Advantage plans, some of which have a track record of denying prior authorization requests inappropriately, can be particularly helpful.
3. Reimagine the patient call center. When leveraged effectively, patient call centers help reduce readmissions, educate patients about price transparency, and so much more. Fortunately, all of this has a positive impact on hospital operating margins. For example, when there are fewer readmissions (because call center agents provide care coordination to identify complications sooner), there are subsequently fewer financial fines and penalties. Likewise, when call center agents provide front-end patient education regarding hospital prices, this decreases the need for downstream efforts to follow-up up aging patient accounts receivable.
4. Perform coding audits, correct errors immediately. The administrative burden associated with appealing and resubmitting denied claims greatly impact a hospital’s operating margin. Ongoing coding audits and corrective education focused on the hospital’s most common inpatient coding errors can have a significant return on investment.
5. Prevent hospital-acquired infections (HAI). One out of every 31 inpatients has an HAI, costing hospitals $28 billion annually. Leveraging coded data to understand risk helps inform strategies for clinical process improvement such as adhering to best practices for prevention and using antibiotics appropriately that can improve a hospital’s operating margins.
6. Address social determinants of health (SDOH). When healthcare organizations collect and report SDOH data, they’re better able to identify and address patients’ social needs. Social interventions directly improve outcomes and decrease costs under value-based contracts, yielding higher operating margins.
7. Negotiate favorable vendor agreements. Negotiations to improve operating margins might mean partnering with a different RCM outsource vendor and perhaps one that employs offshore talent. Other considerations include joining group purchasing organizations that tap into discounts from suppliers or joint venture agreements with freestanding diagnostic facilities to split profit margins and secure risk-based contracts.
8. Streamline updates to the charge description master (CDM). An efficient, updated CDM lays the foundation for analyses into hospital purchasing, dispensing, and billing. Looking for ways to streamline these updates is paramount. Healthcare leaders can derive insights from these analyses to make informed decisions on how to save money, time, and resources.
Looking ahead. Improving a hospital’s operating margin will continue to be a priority for many healthcare leaders. RCM staff and patient call agents play an important role in achieving strategic goals. The ways in which CFOs leverage and operate these teams is important. The time is now for healthcare leaders to think outside the box and take charge of their organization’s financial future.
