Minimizing Financial Risk at Texas Children's Hospital

The Problem

Dramatic changes in the economics of the health care industry were putting the mission of Houston-based Texas Children's Hospital at risk. The country's largest pediatric health care facility was squeezed between rising costs of medical services and equipment, and resistance to absorbing those higher costs by private insurers and public health care financing programs such as Medicaid. In addition, new reimbursement contract structures, including diagnosis-related group (DRG) and fixed-fee-per-patient (capitated) arrangements, were shifting huge financial risks to Texas Children's, demanding a far more sophisticated approach to contract negotiation.

The Analytics Solution

With a mission of saving lives and training physicians, Texas Children's did not seek profit maximization in the manner of an airline, hotel or car rental company. Yet like struggling companies in those industries, Texas Children's took advantage of some powerful analytics-based revenue management support, tailored to its unique financial circumstances. Because a large proportion of the hospital's revenue is contractually based, the cost and revenue implications of complex contracts must be well understood before they are accepted. And since analytics-based optimization models can identify globally optimal solutions that satisfy pre-set goals over multiple forms of contracts, they can provide an advantage to the user of the optimization models that may not be clearly visible to the party on the other side of the negotiation.

Texas Children's collaborated in the development of a customized solution, known as the Hospital Optimization System (HOS), to monitor contract performance and support contract negotiations. HOS, relying on Bayesian forecasting and nonlinear optimization models, uses data from prior patient encounters, including charges and resource usage, and hospital capacity information, to propose optimized contract terms for use in negotiations. The system also forecasts demand for hospital services and provides decision-support capabilities including “what-if” functionality.

The Value

Contracts renegotiated by Texas Children's with the benefit of the HOS are projected, over their first year, to result in a profitable revenue increase of up to $17 million. HOS is also expected to enable managers to improve the effectiveness of planning in facilities utilization, staffing and budgeting.