By Dee DeWitt, Senior Associate, OPEN MINDS
Achieving financial sustainability means creating a performance framework full of possible solutions to the market problems an organization faces. Central to that framework is revenue diversification, which allows health care organizations to grow their core business while securing future survival against environmental pressures. It is possibly the key tool in preparing for and managing the financial sustainability of the organization.
In the last three years, health and human service organizations have been subject to a number of significant pressures impacting services and short- and long-term financial performance:
- A clinical workforce labor shortage and increasing labor costs.
- Uncertainty stemming from changing reimbursement models based on quality performance measures amid downward pressure on operating margins.
- Increasing demands for investments in customer experience to attract and retain consumers and payers in a competitive landscape, including changing Medicaid health care environments.
- A fast-paced push toward digitally-enabled care and program operations, including virtual visits, increased care at home, and in-home digital monitoring.
Why Revenue Diversification?
Diversification makes sense when you consider health care’s dynamic environment. Consumers are becoming smarter about their health and requiring more varied treatment options. For example, the pandemic pushed telehealth to the market forefront, and while its use has leveled off since the pandemic, it is certainly here to stay. Similarly, payers and consumers are demanding options outside of acute settings for more outpatient, lower-cost settings of care. And value-based reimbursement (VBR) models are driving demand for diversification as health care transitions to a focus on value in service options, partnerships, and payer relationships.
Ultimately, this means chief financial officers (CFOs) must move beyond traditional growth strategies and invest in more innovative diversification strategies. My colleague, Ken Carr, notes, “Revenue diversification builds resilience because if there is disruption with one service line or payer, there are other options to sustain operations.”
For specialty provider organizations operating in today’s environment, there are a number of key factors driving diversification:
Expanding revenue and operating margins. By expanding revenue streams, organizations can generate additional income that can be reinvested in consumer care, infrastructure improvements, and technology upgrades. The thoughtful addition of revenue sources can help bolster overall operating margins, offset costs, and support ongoing operations, ensuring the organization’s continued ability to provide quality care.
Mitigating financial risk. Dependence on a single source of revenue exposes health care organizations to significant financial risk. For example, if a provider organization relies on reimbursements from a single payer or government program, changes in reimbursement policies or funding cuts can have a severe impact on its financial viability. Revenue diversification helps mitigate this risk by spreading income sources across various payers, services, and partnerships. This ensures that the organization is not overly reliant on any one source of revenue and can withstand fluctuations in funding.
Adapting to changing reimbursement models. The health and human services sector is undergoing a transition from fee-for-service (FFS) to VBR models. The traditional FFS model reimburses provider organizations based on the volume of services provided, which can be financially unsustainable in the long run. Revenue diversification allows those organizations to explore alternative payment models (APMs), such as bundled payments, capitation, and shared savings programs. By diversifying revenue streams, organizations can adapt to the changing reimbursement landscape and enhance financial stability.
Supporting investment in technology and infrastructure. The changing industry landscape demands increased investment in technology and infrastructure. Many times, provider organizations are contractually obligated to develop new and more sophisticated financial and outcome reporting capabilities. These requirements often impact program operations and administrative functions ranging from revenue cycle management, quality assurance, human resources, financial reporting, and performance improvement. Revenue diversification enables organizations to allocate resources toward meeting these demands.
Improved outcomes and client care. Revenue diversification ultimately leads to improved care outcomes. With a stable financial foundation, provider organizations can invest in quality improvement initiatives, consumer safety measures, and staff training programs. This allows for better staffing ratios, reduced wait times, enhanced care coordination, and improved consumer satisfaction.
Fostering collaboration and partnerships. This is an area particularly important in a market that has both an increased focus on whole-person care and finite resources. Organizations can explore joint ventures, strategic alliances, or affiliations with other provider organizations. Such partnerships not only enhance revenue generation opportunities but can also foster knowledge sharing, resource pooling, and economies of scale.
Enhancing community engagement. Diversification allows organizations to invest in community education initiatives and preventive care services. By expanding their reach and addressing social determinants of health, provider organizations can play a more active role in promoting wellness and population health management. This not only benefits the community but also establishes the organization as a trusted partner in improving overall health outcomes.
Key Considerations in Weighing Diversification Options
There are several key financial, strategic, and operational considerations as executives begin researching when and how to diversify revenue streams. An appropriate place to begin is with a service portfolio analysis. Service portfolio analysis is a tool to help organizations assess service lines for both mission fit and profitability and to identify market opportunities that are not part of the current portfolio.
When analyzing diversification options, the following are some other key questions CFOs and the executive team should consider:
- Is there an existing profitable service offered by my organization that could serve a different geography or consumer base?
- Among my organization’s existing customers, are there new services that are in demand and could be offered? Many times, the best research is to simply ask payers what needs they have, then determine if you have, or could develop, the capabilities to meet those needs. Considerations will include estimating regional demand (or expected utilization), reimbursement rates, and payment models.
- For any potential new or planned expansion of service lines, have you conducted an analysis of the projected revenue, estimated costs, and potential cash needs for development? Do you have adequate cash reserves to reach breakeven? For each service line, what staffing will be required, and what is the workforce landscape?
- What are the license and accreditation requirements? Does my organization meet those requirements? If not, what is the projected timeline to obtain the needed licensing and/or accreditation? Often, organizations underestimate the time required to obtain the necessary licensing and accreditation.
- What impact will implementing revenue diversification initiatives have on current business operations? Do you have the bandwidth at the program level to implement new diversification initiatives?
- What level of financial risk can my organization or company tolerate as I invest in revenue diversification opportunities?
- Do I need to invest in new technology to provide a new service or adopt a new revenue model? At what investment cost?
- What is the expected return-on-investment (ROI) for the new program or expanded service? For the technology?
- Does my finance team—and does the executive team—have the bandwidth to fully research, analyze, and implement diversification opportunities? Or should I engage a firm to assist in these efforts?
CFOs are increasingly required to operate at a strategic level and be experts at managing day-to-day financial and accounting performance, the revenue cycle, productivity, and reporting. Today’s health and human services landscape places even more pressure on CFOs to be prepared to plan for and implement revenue diversification strategies as a necessary component of long-term financial sustainability.