January 2017

Industry Perspectives: Bursting the ICD-10 Cost Bubble
By Dale Kivi, MBA
For The Record
Vol. 29 No. 1 P. 5

Fueled by its stutter-start change-over date and a Y2K-type fear of potential doom, ICD-10 necessitated significant pretransition investments to ensure ongoing coding operations. But unlike the definitive Y2K event that concluded as the calendar turned to January 1, 2000, increased coding operating expenses compelled by ICD-10 production uncertainties have produced an undeniable cost bubble that's about to burst. As we enter 2017, it's time to prepare for when it pops.

Before defending current market prices, it's important to understand the cause behind the cost bubble and why it is doomed to burst, especially since front-line coders will suffer the worst—even though many outsourced coding vendors could argue the impact they're already feeling is more severe. The fact is these two groups were inevitably tied together in creating the bubble and will undoubtedly suffer together as the going compensation rates for each drop with the pop.

What Caused the Bubble?
Thanks to post–ICD-10 productivity uncertainties, coders and coding service vendors experienced healthier than normal financial rewards over the past few years. According to AAPC's annual salary survey, industry unemployment was less than 1% at the end of 2015 and less than 2% the two years prior. These limited talent pool conditions, combined with the productivity uncertainties, resulted in a notable increase in coder salaries along with a dramatic increase in the use of outsourced service vendors, enabling some companies to write mind-numbing contracts for as much as $100 per hour per coder as long as they could deliver qualified staff to get the job done.

During these times of high demand, vendors were happy, coders who jumped ship to join the high-paying services were happy, and in-house coders who were incentivized to not jump ship and chase after $5,000 sign-on bonuses were happy. So whether coders joined one of those fast-growing service vendors or stayed put, the result was coders got paid. What could ruin this picture?

The problem is the switch to ICD-10, much like Y2K, went better than expected. Admittedly, it took a while for the industry to adjust, and some groups settled in more quickly than others. But more than one year after the ICD-10 go-live date, the majority of departments indicate productivity is back to where it had been under ICD-9 or there's been no more than a 10% decrease. That should be good news, right?

Why It Can't Last
Yes, it's great the industry properly prepared and proved itself able to adapt. Unfortunately, with productivity levels up to speed, the business value of the coding process will certainly be reviewed and recalibrated with hopes of returning to pre–ICD-10 spending levels. There's no question that the investments in the change were required, but now that the industry is over the hump, ongoing expenditures must be reevaluated by those responsible for managing an organization's total operating costs.

I'm neither suggesting there is no difference in the work required nor disrespecting the Herculean effort made by coders to upgrade their skills and adapt to the code set change. Personally, I'm in awe of the accomplishments and how cleanly things went. Sincere kudos are due to every coder, quality assurance specialist, department manager, and director for a job well done. Unfortunately, it doesn't change the need for organizations to constantly look for ways they can reduce costs. So even though things are calming down, we shouldn't expect it to last.

Why Costs Will Drop
The unknown increases in coding production times and lack of available talent are in the past. In a turnaround from the months leading up to the changeover, departments now know how many charts per hour to expect from their staff. Productivity levels are pretty much back to normal and all that extra help brought onboard to manage through the transition is simply no longer needed. Consequently, many well-trained, seasoned coders are flooding the market looking for work. Plus, new entries—both offshore and domestic—driven by the promise of a fast-growing field in need of qualified participants have further flooded the market.

On the vendor side, since departments no longer need to outsource volumes in desperation mode, $80 to $100 per-hour contracts are no longer. To stay in business, services have to dramatically reduce their rates (and pay scales). But because many hospitals prepared for the transition with a combination of increased in-house staff and vendor contracts, many clients simply no longer need the outside help—even at severely discounted rates.

This topsy-turvy market flip from high demand and lack of talent to lower demand and an abundance of talent will inevitably force vendor and labor rates to decrease. Basic supply-and-demand economics will force coders and vendors alike to go lower and lower in order to survive. And it's already happening.

The financial recalibration is currently most obvious in the outsourced services arena. All those vendors that waved dollar bills in front of in-house coders to jump on their outsourced bandwagon now struggle to keep them busy. Consequently, coders are forced to sign with multiple services in search of enough hours/production volume to cobble together a decent income. Higher hourly wages don't help if hours are dramatically cut.

Service vendors now face more available staff than contracted production volumes. New employees, desperate for hours where they can actually get paid, are signing up for notably lower hourly rates. As those cheaper labor-cost coders prove their ability to get the job done, vendors shift their remaining volumes to them to salvage margins at their lower contracted prices. And although coders typically are making less than they did at the jobs they left to enter the outsourcing world, at least it's enough to live on.

Of course, when vendors shift their available volumes away from their higher hourly rate earners, those previously well-compensated staff members are forced to find production hours at side jobs … at lower rates … and the cycle repeats itself. As mentioned, this is already occurring. The snowball began as soon as the high-priced service contracts with guaranteed volumes that were signed in panic mode came up for renewal. And although the impact is currently being felt almost exclusively in the outsourced community, the momentum will inevitably carry over to in-house departments. As service prices and coder pay rates continue to tumble in the outsourced marketplace, the potential total operating cost savings available to in-house departments will soon be too significant to ignore.

Historical Precedent
ICD-10 led to a dramatic increase in the number of hospitals using outsourced services. Depending on the study, the numbers indicate outsourcing increased from approximately 15% (consensus percentage in 2014) to somewhere between 45% and 60% in 2016. Although only 30% (a consensus of most studies) of department volumes were outsourced, that three- to four-fold growth in outsourcing hospitals triggered market dynamics industry veterans have seen before.

Over a 10-year period beginning in the mid-'90s, outsourced transcription services jumped from 15% to 50% market use. As momentum increased, the long-standing transcription service community began to consolidate, leverage technology, and attract offshore competition. Early high-priced service contracts started to disappear as competition from a more sophisticated vendor landscape moved past simple domestic labor supply agreements to leveraged technology and economies of scale, driving down their operating costs and reducing market price expectations. Vendors that couldn't match the lower prices were squeezed out of business.

Now that coding vendors are being forced to respond to a reduced share of the market being outsourced, they have no choice but to follow in transcription's footsteps and significantly drop their prices or face going out of business. Whatever market share is still available will go to those that can deliver broader-based solutions at lower costs. And because some coding vendors attracted notable investment dollars while writing prebubble high-dollar contracts, they (or at least the smart ones) have invested those resources to buy or develop technology-driven competitive advantages and/or offshore labor partners to help lower their costs and position themselves to capture market share. Inevitably, this will squeeze out smaller, less technically savvy competitors.

What's Next?
This spring, the AHIMA Foundation will convene a panel of industry experts tasked with launching a study on coding productivity and accuracy. Their mission is to establish benchmarks for charts per hour based on competing EHR, encoder, and computer-assisted coding technology. The study will also define industrywide coding quality metrics and reporting recommendations so that everyone can be measured against verified national performance standards. Their ultimate objective is to establish a sustainable productivity and accuracy research mechanism capable of driving continuous process improvement through ongoing data collection.

After the study results are collected and published, definitive coding productivity and accuracy targets will inevitably be incorporated into individual employment and outsourced service vendor agreements. Subsequently, individual staff members and vendor relationships will be judged by how well they perform against these newly defined industry standards.

My expectation is that once performance standards are identified, service companies will aggressively promote their ability to hit those targets more cost-effectively than their in-house counterparts. They will do so by bundling their own technology—thus eliminating those costs for hospitals—and staffing with coders who have already been forced into accepting lower wages and cheaper/lesser benefit packages.

The promise of such technology, wage, and benefit cost reductions will drive a second and stronger round of outsourced market share growth, immediately followed by further pay erosion as those formerly well-compensated in-house coders start to reach the open market. It may not be fair, but that's how an outsourced service market responds when labor supply exceeds—or at least outpaces—demand, which is where the industry stands now that ICD-10 productivity rates have stabilized.

Similar to the early transcription service market, even though an offshore labor option is often considered a last resort, once a few such firms establish credibility (which has been done), domestic pay rates must fall to align with new market expectations. In the end, even those who stay true to fully domestic vendors can expect their costs to drop significantly because the wider the price gap, the greater the chance someone like the chief financial officer will make a decision to take the risk for the added savings. In the end, every firm will have to drop its rates to survive. As a result, the market probably won't reach bottom for a few years.

Sooner Rather Than Later
The coding market chaos isn't over—it's just shifting gears. There's a lot of pain to come, and it's arriving soon. Many coding service vendors are already hitting the wall, yet I'm convinced coders will ultimately take the biggest hit. That's how things unfolded in transcription, and history has a tendency to repeat itself. The only difference may be that the ICD-10 cost bubble and resulting vendor struggle for survival will cause the coding market recalibration to happen at a greatly accelerated pace. The race is on to cut costs and offer rates too good to resist in order to survive.

The best advice for coders is to stay focused on the details. Accuracy will always be king—there's too much at risk if it is not properly maintained. Department managers and directors need to run a tight ship and soon they will have national standards to measure against. How you measure up against them will determine your future.

Pop …

— Dale Kivi, MBA, is vice president of business development for FutureNet and will chair the AHIMA Foundation coding productivity and accuracy study targeted to launch in spring 2017.