A Revenue Manager’s Point of View on Hospitals

INDUSTRY OVERVIEW

Definition
A hospital is a healthcare institution that provides complete medical care ranging from diagnostic services, to surgery and nursing longterm care. There are many different types of hospitals that all specialize in different types of patients. For revenue management purposes, we will focus on General Hospitals in the United States – which is set up to deal with diseases and injuries along with immediate and urgent threats to death. Hospitals typically have two types of patients: inpatients and outpatients. Inpatients are patients who stay overnight and seek long-term care. Outpatients are patients who stop in for a day and leave once they are treated. Most hospitals also have their own ambulance services.

For a more in-depth overview, go to http://en.wikipedia.org/wiki/Hospital#Modern_era.

Funding
Hospitals get their funding from a variety of sources; however, they can usually be grouped into two different categories (for profit and nonprofit). For profit hospitals are funded by shareholders and their main purpose is to gain more return for their shareholders. Nonprofit hospitals can be funded by a variety of sources (government, religious denominations, etc.) and they use their revenues to improve the hospital’s inner workings rather than as profit for shareholders.

Employees
Perhaps the most unique aspect of a hospital is the numerous different types of staff. A single patient can require a personal primary physician, multiple residents and interns, nurses, social workers, transport staff, dietitians, administrative staff, laboratory staff, special service providers (therapy/rehap), pharmacists, and many more depending on the reason for the visit. Due to the immediate needs and unpredictability of emergency patients, the staff usually works long shifts (48 hours at a time).

Customers
Also unlike the hospitality industry, customers usually don’t choose to come to a hospital. They usually visit a hospital when they are in need and have to be served immediately. Each customer is also different in their diagnosis and treatment because no two customers have the same internal physical attributes.

Unique Aspects of Hospitals Pertaining to Revenue Management

  • Lack of flexibility in service requirements – unlike restaurants where any server can serve any guest, patients at hospitals have to go to a specific doctor based on their disease/injury and the doctor’s specialties and skills. 
  • Unplanned hospital visits – hospital patients only go to the hospital when they are sick; therefore, it is difficult for hospitals to forecast or control their demand.
  • Transparent variable pricing – hospital patients are often charged based on the services they receive (blood test, MRI scan, etc.) and the doctor’s time spent on the patient. Because most of the patient’s treatment options are dependent on what type of disease/injury they have, how much they will pay during the course of their stay is fairly predictable for the hospital.
  • High occupancy and constant queue – hospitals are always busy at all hours and there is usually a line waiting for a doctor; thus, revenue management would focus more on how to increase the throughput rate of customers through the hospital system rather than how to attract more customers.
  • Low competition, if any – depending on the size of the city, hospitals could have very few or no competitors; therefore, profit improvement would be more affected by speed than service level.
  • Control of transportation to and from the hospital – most hospitals have control of their own ambulances and helicopters to bring customers to and from.
  • Customer satisfaction as an afterthought – while doctors do take into account bedside manner, in terms of revenue, customer satisfaction takes a back seat. Most patients would want to avoid a hospital visit if they can; therefore, improving the patient’s mood from “content” to “extremely happy” usually contribute to improvements in revenue.
Hospitals typically define their space as Revenue Per Available Hospital Bed Per Hour. Hospitals practice price discrimination by charging for equipment used, who the doctor was, and the amount of the doctor’s time the service took. Similar services (such as the common cold, stitches, etc.) are usually charged at a similar price. Hospitals usually practice price discrimination by charging at an absurdly high prices for services and then accept different levels of payment on them. (http://www.medscape.com/viewarticle/521175_3). Value definition in hospitals are also tricky. While patients who require more long term care (ex. chemotherapy) are charged more, they also tend to default more on their payments; thus, charges for simple hospital visits such as stitches in the ER are purposely overpriced to make up for the payment defaults. The following photo shows a typical treatment cycle for patients.
SPACE IN HOSPITALS
Hospitals sell their space implicitly – they only have a certain amount of hospital beds and patient care rooms. Hospitals typically divide their space by type of service provided (radiology, ER, ICU, etc.). Each department or “wing” is divided by specialty and necessity to formulate the most efficient paths for doctors and nurses to their patients. Space is also tricky with hospitals because they have to leave a certain amount of beds open for emergency situations. Below are four different floor plans of hospitals.

 

Hospitals use space to generate revenue in a number of different ways. The following are examples of how hospitals use space to maximize revenue:

  1. Efficiency of Movement – Hospitals group their space by services rendered and necessary machinery needed so doctors can stay within their wing of the hospital to service all their patients.
  2. Differentiating Room Quality – Some hospitals offer larger rooms with better views for patients who are willing to pay more to be upgraded.
  3. Cafeteria Food – Due to the length of stay of some patients, hospitals offer food and beverages to the patient’s visitors.
  4. Include Different Revenue Generators – Different revenue generators such as a pharmacy or a gift shop are also a good use of space in hospitals.
Creativity in Space Definitions
A hospital’s space creativity must always be centered around the best care for the customer. Ways hospitals have been creative about dividing up space includes:
  • Building an offsite lounge for visitors to reduce crowding in the main hospital building.
  • Placing departments that utilize the same machinery close to each other.
  • Changing the number of patients per room based on each patients needs and preferences.
  • Using the waiting rooms as a source of advertising for their current doctor’s professions – hospitals sell their physician’s skills rather than service. Thus, using the waiting room to sell books/reports written by their physicians is a good way to advertise themselves to receive more customer referrals and to build customer confidence in their skills.
TIME IN HOSPITALS
Hospitals typically define their time implicitly  by customer treatment. Each patient requires a different treatment and thus has a different treatment and recovery time. Although hospitals define time implicitly, there are also certain practices of explicitly defined time:
  1. Fee per bed per hour – most hospitals price their customers based on how long they use the treatment bed per hour.
  2. Meals – meals are often served and charged to patients based on the amount of time they stay. For example, if a patient is there for 6 hours they would be served and charged for two meals.
  3. Hospital Recovery Limitations – as stated in Strategic Levers of Revenue Management, certain hospitals have put a max number of hours new mothers can stay in a hospital after giving birth.
  4. Internal Time Management – Hospitals can also have internal incentives that specify how long a certain procedure should take and then train their employees on meeting those standards. (ex. stitches should take no longer than 10 minutes).
Revenue in a hospital is directly linked to service time. Thus, creativity in improving efficiency is a major focus for hospitals. Ways hospitals could improve their service time includes:
  • Upgrading all medical record keeping to electronic to speed up information sharing between doctors.
  • Disciplined process management that is focused on maximizing teamwork efficiency and decreasing employee downtime.
  • Use customer waiting time to have customers fill out surveys about their needs and wants to better know the customers.
  • Use statistical analysis to forecast the demand every day
PRICE IN HOSPITALS
Hospitals are the masters of variable pricing. Almost every patient pays a different price for their treatment. These different prices comes from both physical and nonphysical rate fences. Some physical rate fences includes:
  1. Room Quality – inpatients can sometimes pay more to stay in a bigger room with a better view.
  2. Machinery Used – different types of machines used will different amounts for patients.
  3. Transport Services – customers who are transported to the hospital via ambulance or helicopters will pay more than customers who found their own methods of transportation.
  4. Tests Taken – like machinery used, customers who decide to take more tests (blood, etc.) are charged more money.
Some nonphysical rate fences include:
  1. Doctor’s Skill – some doctors are more knowledgeable or more famous than others. These doctors would generally cost more money to see.
  2. Time – the length of stay of a patient would affect the rate that he/she pays.
  3. Ability to Pay – Most hospitals have absurdly high prices for their services because they don’t expect every patient to be able to meet the full amount. They will charge high prices for wealthy patients and accept payments that are less than the full amount from patients who are less financially well off.
Some creative ways hospitals can implement rate fences are:
  1. Partnering with restaurants and charging a premium for patients who want something other than cafeteria food.
  2. Cheaper prices for patients willing to share their rooms with more people.
  3. Implement higher prices for patients who need to take a longer time to pay their hospital bill (loan to maturity model).

48 thoughts on “A Revenue Manager’s Point of View on Hospitals

  1. The luxury hospital thing is pretty interesting. Quite true about them being the ‘master of physical rate fence’. I would argue that they sell time both explicitly and implicitly. They charge by the day (maybe sometimes the hour) and also charge by type of treatment. What do you think?

  2. You have not focused on one more important aspect, the optimization of revenue from the types of equipment which are high value hardware which are of very high value but may not be used 24 hours a day. You can then price for peak hours and off peak hours, lab tests if done day time a higher rate and night time lower rate and more.

  3. Interesting, however here you have focused on revenue optimisation based on existing demand. Its revenue increase by reducing costs, by implementing efficiency strategies and price versus costs. However the basic principle of revenue management is to offer the service at the right time at the right place right price to the right customer in order to optimise the revenue for a that same product / or service; for medical services as written here there are many other variables involved. As we can not really play around and say what shall we charge for a PEG procedure at a certain time in order to increase demand and optimise revenue …Hence revenue management for hospitals (other than private clinics that only offer non-urgent particular services like for example eye laser, dental aesthetics etc.) is more a lean management principle. How to become more effective in order “to have more left at the end of each procedure, patient visit, treatment etc.)

    New technology in patient communication, Documentation systems etc could be of help. Medify has developed a patient communication journey what saves up to 75% of the consultation time per patient by a digital planning process from home. Also Medify has a digital / 3D hospital planner for floor planning and equipment.

    In case of interest please contact at anouk.tenten at medify . eu

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