The encyclopedia · Finance & Accounting · Financial decision · 1998–2004
A nonprofit children's hospital priced insurer contracts with optimization
Texas Children's Hospital used forecasting and nonlinear optimization on insurer contracts, adding up to $17m a year.
Texas Children's Hospital · PROS Revenue Management
the move
In 1998 Texas Children's Hospital faced mounting financial pressure as payors sought to cut spending while physicians wanted the highest-quality patient care, research and teaching; its nonprofit mission was in jeopardy.
Working with PROS Revenue Management, it brought analytics to administrative operations, initially focusing on optimizing contracts with insurers, which had large revenue leverage; it forecast expected future demand, established risk as a measure of contract performance, and embedded Bayesian forecasting and nonlinear optimization in software used by negotiators.
The system improved revenue by up to $17 million a year on renegotiated contracts, and its success spawned planning and operational improvements with potential to transfer to other hospitals.
why it works
- Insurer contracts set the reimbursement that determines a hospital's income.
- Each contract carries different rates and risk, so some were underpriced.
- Forecasting demand and measuring risk justified better terms at renewal.
- Measured: up to $17m a year on renegotiated contracts.
what transfers
For a business that earns its money through negotiated recurring contracts, price the contract as an optimization over expected demand and risk rather than anchoring to last year's rate.
what came after
The work brought revenue improvements of up to $17 million a year and expanded the hospital's analytics into planning and operations; it was a Franz Edelman Award finalist and designed to transfer to other hospitals.
references
- Contract Optimization at Texas Children's Hospital
- Contract Optimization at Texas Children's Hospital
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