IHP 630 Module 3 Milestone One Example

Milestone One: How Stonebridge Lost Its Margin

[Student Name]

Southern New Hampshire University

IHP 630: Healthcare Finance and Reimbursement

Module Three Milestone One

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Milestone One: How Stonebridge Lost Its Margin

IHP 630 ends with a financial improvement plan for a health care organization. This milestone sets up that plan for Stonebridge Regional Medical Center by describing how its operating margin fell from positive to negative in three years, breaking the decline into revenue and cost drivers and stating the problem the plan must solve.

The Decline in Numbers

Three years ago, Stonebridge earned an operating margin of 1.9%. Two years ago it fell to 0.4%, and last year to minus 1.8%, an operating loss of $5.6 million. Over the same period, operating revenue grew by about 9%, while operating expenses grew by about 13%. The problem, in short, is that costs have outrun revenue.

A Fair Unit of Comparison

Total dollars can mislead when volume and service mix change. Hospitals therefore compare revenue and cost per adjusted discharge, which converts outpatient activity into inpatient equivalents and adjusts for patient complexity using the case mix index. Stonebridge's adjusted discharges rose slightly, from 21,400 to 21,900, and its case mix index was stable at about 1.45.

Revenue per Adjusted Discharge

Net patient revenue per adjusted discharge rose from $12,650 to $13,520, about 6.9% over three years, or roughly 2.3% a year. Medicare's annual payment updates averaged about 2.5%, Medicaid rates were frozen for two of the three years and commercial rate increases averaged 3% but applied to a shrinking share of patients, as commercial volume fell from 32% to 29% of revenue and Medicare rose from 43% to 46%.

Cost per Adjusted Discharge

Operating cost per adjusted discharge rose from $13,210 to $14,410, about 9.1% over three years. Three categories explain most of the increase. Contract and agency labor rose from $4 million to $15 million as nurse vacancies climbed. Supply costs rose 17%, driven by implants and drugs. And revenue lost to claim denials and write-offs grew, while the staff needed to manage denials increased.

Table 1. Revenue and Cost per Adjusted Discharge Over Three Years

Note. Composite data; per-discharge figures use net patient revenue and total operating expense.

How Hospitals Respond to Payment Pressure

White and Wu (2014) examined how hospitals responded when Medicare prices grew slowly and found that they generally cut operating costs, including staffing, rather than raising prices for private insurers. Their findings suggest that pressure on public payments can push hospitals toward efficiency, although cuts can also affect quality if made carelessly. For Stonebridge, whose payer mix is moving toward Medicare, the lesson is that cost structure, not negotiation with commercial insurers alone, will determine whether the margin recovers.

The Labor Story

Agency labor deserves particular attention because it grew almost fourfold. Registered nurse vacancies rose from 6% to 14% of budgeted positions, and the hospital filled gaps with travel nurses at hourly rates roughly double those of employed staff. Overtime also climbed. Exit interview data point to scheduling inflexibility and workload as leading reasons for departures, suggesting that part of the cost problem is a retention problem. Every twenty positions converted from agency to employed staff would save roughly $2.4 million a year at current rates.

Supplies and Service Mix

Supply cost growth is concentrated in orthopedic implants, cardiac devices and oncology drugs. Surgeons use implants from five different vendors for similar procedures, and the hospital has no standard formulary for them. Meanwhile, outpatient procedures have shifted toward independent surgery centers nearby, leaving the hospital with more complex, costlier inpatient cases and less of the profitable outpatient volume that once offset them.

Pressure and Cost Discipline

Stensland et al. (2010) showed that hospitals with weak private revenue and strong financial pressure tended to keep costs lower than hospitals with abundant private revenue. Stonebridge's costs per adjusted discharge now exceed those of peer hospitals by about 6%, suggesting that during its profitable years it built a cost structure its current payer mix cannot support.

The Cost of Getting Paid

Denials have become a problem of both lost revenue and added expense. Tseng et al. (2018) timed the billing and insurance work behind physician services at one university health system and found that the effort needed to bill and collect was lowest for simple office visits and highest for inpatient surgery, and for low-priced services it consumed a strikingly large fraction of what was collected. At Stonebridge, the initial denial rate rose from 7% to 11%, and the revenue cycle department added six full-time staff to work denied claims.

What Is Not Driving the Loss

Volume has not collapsed; adjusted discharges rose slightly. Case mix has been stable. And the hospital's charity care, about 3% of costs, has not grown disproportionately. These findings narrow the problem to cost growth and revenue leakage.

Problem Statement

Over three years, Stonebridge's operating cost per adjusted discharge grew about 9% while net revenue per adjusted discharge grew about 7%, turning a 1.9% operating margin into a $5.6 million loss. The main drivers are agency labor, supply costs and rising claim denials, compounded by a shift toward lower-paying Medicare and Medicaid volume.

Scope

The financial plan will address cost per adjusted discharge, the revenue cycle and selected service line investments. It will not address a merger or affiliation, which the board has deferred, or changes to charity care policy, which are governed by the hospital's mission and tax-exempt obligations.

Questions for Later Milestones

Milestone Two will ask how much revenue denials and slow collections are costing and how they can be reduced. The costing paper will ask what a common procedure actually costs to deliver. Milestone Three will test whether investing in an ambulatory surgery center would improve long-term finances.

Conclusion

Stonebridge did not lose its margin because patients disappeared. It lost it because costs rose faster than payments while more revenue slipped away through denials. That framing points the plan toward labor, supplies and the revenue cycle, where the hospital has real control.

References

Stensland, J., Gaumer, Z. R., & Miller, M. E. (2010). Private-payer profits can induce negative Medicare margins. Health Affairs, 29(5), 1045-1051. https://doi.org/10.1377/hlthaff.2009.0599

Tseng, P., Kaplan, R. S., Richman, B. D., Shah, M. A., & Schulman, K. A. (2018). Administrative costs associated with physician billing and insurance-related activities at an academic health care system. JAMA, 319(7), 691-697. https://doi.org/10.1001/jama.2017.19148

White, C., & Wu, V. Y. (2014). How do hospitals cope with sustained slow growth in Medicare prices? Health Services Research, 49(1), 11-31. https://doi.org/10.1111/1475-6773.12101