Contract optimization at Texas Children's Hospital

In 1998, faced with mounting financial pressure, Texas Children's Hospital found its mission in jeopardy. Payors sought to reduce expenditures, while physicians wanted to provide the highest quality patient care, research, and teaching. Working with PROS Revenue Management, the hospital spearheaded an initiative to bring greater analytic capabilities to administrative operations, initially focusing on optimizing the performance of contracts with insurers because of the potential revenue leverage. It did so by (1) quantifying expected future demand through forecasting, (2) establishing risk as an important means of measuring contract performances, and (3) embedding the underlying Bayesian forecasting and nonlinear optimization models in a software system that supports the daily activities of contract negotiators. Direct benefits include revenue improvements of up to $17 million annually on contracts renegotiated with use of the PROS technology. The project's initial success has spawned efforts to improve the hospital's planning and operational activities. With a system designed for transfer to other hospital settings and possible enhancement of the diagnosis-related group (DRG) classification system through the use of patient pathways, the health-care optimization technology has the potential for broad impact in the industry.