Cost-Based Reimbursement Business Modeling
By Jay Boyer, MBA, Partner, Facktor
When we think of a successful business, we often think of one that makes the most money. In business school, they teach us that it means maximizing shareholder value. In the non-profit world, we of course, don’t have traditional shareholders. No one owns a community health center. Instead, it is presided over by a Board of Directors which is charged with protecting the interest of the real owners—the community.
So what does it mean to the finance team to be a non-profit? Many of our non-profit clients make plenty of profit. With proper stewardship, they have healthy cash reserves, large assets, and strong bottom lines.
The answer is complicated and understanding it can be the difference between success and failure. It starts with contracts with the Federal, State and Local governments. In our healthcare industry, these contracts vary from program to program. In some cases, an organization is reimbursed by invoicing the costs incurred to run the program. The contract begins with a specific budget and purpose, and the income generated, either through grants or patient service revenue, is restricted only to that program and must be spent within the project period. This model creates challenges in growing an organization, which usually limits that growth to finding alternative revenue streams, such as foundations or other grants.
The Federally-Qualified Health Center model functions with greater flexibility, allowing health centers to have positive net incomes, since the revenue streams generated from the program are broad enough to include other payors, such as private insurance, Medicare, other public programs, and payments made directly by the patient. So long as the health center spends their income within the scope of the project, they can put away reserves for future growth. This freedom allows health centers greater sustainability and provides the freedom to focus on providing more integrated services and expansion into additional under-served markets.
This also creates unique shifts in strategy on how to grow the business. Each payor or program provides its own rules, and understanding those rules allows the health center to either benefit or to take on unnecessary risk. A misunderstanding of how Medicaid reimburses, which is based on cost reports and reconciliations, can result in a health center having to pay millions of dollars back to the State. We’ve seen this several times in the last year, with clients assuming that certain incentive payments are outside the reimbursement model and have to pay them back, or when CFOs fail to account for large reconciliation liabilities, which may not be finalized for years, and can come with a surprise letter with a 30-day due date.
The bottom line is that financial success for health centers is highly dependent on knowing the business model and the rules of the game. We may not be in this for profit, but that does not excuse us from needing a strong financial command to be successful in our mission. Not understanding the rules is not an acceptable excuse when it comes time to reconcile. That is why it is so important to have a financial team backing up your organization, not just with core accounting functionality, but with an ability to navigate the world of cost-based reimbursements. Without it, an organization may find itself falling in traps it should have seen coming.
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