The Power Cycle

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January/February 2004

By John R. Thomas, MBA

Knowledge is power,” wrote 16th-century scientist Sir Francis Bacon, and the advice is still valuable today. In our computer driven 21st century, we are drowning in data, but often short of real knowledge. This is particularly true in many health care organizations, where a constant flow of paper to dozens of payors makes it difficult for office managers to analyze effectively key elements of their revenue stream.

The creation of real business knowledge through the careful collection and analysis of data is at the heart of an effective revenue cycle measurement program. Basically, the term refers to the use of detailed financial reporting to reduce denied claims, decrease accounts receivable (A/R), and monitor payor performance. The goal is to get as much out of the revenue stream as possible. The need for medical groups to improve their revenue management has never been greater.

There are more than 5 billion medical claims filed each year in the United States. Of these, 30% are delayed or denied on first submission. Fifty percent of those denied claims (15% of total claims) are never resubmitted. The average cost to process a claim manually in a small medical office is $8 to $12. The average length of accounts receivable in most medical practices approaches 70 days.

In working with medical groups, clinics, and rehabilitation facilities across the country, we have found the average organization is losing around 12% of overall revenues due to poor revenue management. Can you imagine if your bank lost 12% of your checking account every month due to poor accounting? You would never tolerate it. Yet many health care practitioners seem resigned to writing off a substantial portion of their income due to poor billing procedures.

The Four Keys
There are four key metrics by which to measure your practice’s financial performance:
1. DOS/DOCE: Measures Internal Billing Efficiency
Monitoring internal billing efficiency is the first step toward maintaining sound financial health. Productivity is lowered when a staff faces challenges in getting access to proper patient, insurance, and billing information. For example, in some cases, each time the patient receives care, information must be entered in separate electronic and paper record systems.

The first key events in the health care billing process are: the DOS (date of service) and DOCE (date of charge entry). Financial managers need to check on the time lapsed between providing the service, entering the charge, and billing for it. At some organizations, services are entered into the accounting system only two or three times a month, creating a lapse of 8 to 10 days.

In many cases, payors place time limits on claims. If it is not submitted within a certain time limit, it may not be paid. By upgrading accounting software and streamlining billing procedures, many organizations find they can reduce their DOS-DOCE time substantially. The greater the time delay between DOS and DOCE, the greater likelihood that information will be lost or inaccurate, creating a denial.

2. Accounts Receivable
For medical offices, A/R records the billing of services provided to patients, but not yet collected from payors. It is a commonly accepted accounting principle that the longer the receivables are outstanding beyond the expected payment date and relative to industry norm, the lower will be the probability of collection. Financial managers must also be able to check the “trend” in A/R, since this may be a sign of a larger problem.

Key numbers to watch include the total dollar amount in A/R and the average days of revenue in A/R. It is highly desirable for medical groups to have an average A/R under 55 days. However, many organizations have between 60 and 90 days average A/R. Changing office procedures to reduce the overall amount of revenue in A/R can produce substantial returns.

3. First-Run Claims Denial Rates and Patterns
As noted earlier, up to 30% of claims of many health care organizations are denied on first submission. Denials occur for a variety of reasons such as eligibility, improper formatting on claim submission, medical necessity, etc. Many medical groups continue to tolerate an endless flow of reviewing and resubmitting denied claims. They accept this as a necessary evil and do not perform any analysis on what is causing them in the first place. Understanding how to solve an issue causing a type of denial will save a substantial amount of future work and, more important, reduce the amount of practice revenue at risk. A thorough analysis may reveal a system flaw—perhaps key billing information is not being collected, or needed attachments or modifiers are missing.

A systematic effort to reduce denials will reduce A/R and bring more cash collections.

4. Know Your Strengths and Weaknesses
In managing your business, it is very important to clearly understand your own business position. What services are making the most money for you? Which therapists within the organization are the most productive? What locations are most profitable and why? By carefully collecting and analyzing data, you can develop a complete profile of the organization’s strengths and weaknesses.

Too often, practices add new personnel or open new offices without any solid analysis of the projected rate of return. In gauging the efficiency of individual staff, it is important to look at actual revenue produced rather than just total services provided. A therapist may be seeing many patients each day, but not entering all the data correctly for billing purposes.

It is also important to identify the relative value of services. It is possible for a provider to be extremely busy, performing many services, but producing relatively low income due to the reimbursement rates. There may be a variety of reasons for this: patient mix, office location, or payor contracts.

Challenges for Rehab Managers
Rehabilitation practice managers face a number of special challenges in collecting and analyzing revenue data. These include:

Many therapists provide services in patients’ homes. It can be difficult to track and reconcile these services.
A high rate of cancellations and no-shows.
Many procedures require physician referrals in order to be covered by payors.
The workers’ compensation system uses an entirely different coding and billing system than Medicare and health plans.

Managers can take heart, however, as recent advances in computer technology have produced very sophisticated practice management systems. These technologies allow automation of administrative and financial workflow. By integrating back-end billing functions with scheduling, eligibility, and charge capture, an organization of almost any size can ease administrative overhead and significantly reduce the number of denied claims.

These advanced systems enable medical groups to scan, store, and retrieve documents such as EOBs (explanation of benefits), payor checks, and patient registration forms. This capability allows staff to instantly access the documents for improved customer service and increased self-pay collection.

The new software can also compile claims rejected by insurers and match them against the group’s own information base daily. Practice staff or an outside vendor can then compare all relevant data, correct the claim (eg, fill in missing information), and route the revised claim to the appropriate payor.

In addition to handling initial or primary claims, the new technology can automatically handle the management and submission of all secondary claims at a fraction of the cost of manual processing. This new revenue can add up quickly. Because most secondary claims are for amounts under $25, many groups believe they cost more to process manually than they are worth and never pursue them.

Without an automated claims system, office staff can become consumed in tracking down and resubmitting individual claims and lose sight of the bigger picture: identifying and correcting the systemic problems that cause rejected claims in the first place.

Integrating New Technologies
When acquiring any new technology, including financial management systems, system integration should be a top priority. Some clinics have made the mistake of buying a new digital imaging software program and a $5,000 document scanner only to find they do not interact with their other management systems. In order to realize their full potential, digital images need to be accessed by other systems that can retrieve and analyze the data and use it for a variety of applications.

The best course of action is to develop a strategic plan for purchasing and managing new technology, rather than buying on a piecemeal basis. Management should consider the kind of technology needed and whether to outsource the IT function or manage it themselves.

Many small and medium-sized organizations have decided against purchasing the needed technology outright and instead have opted to lease it through an application service provider (ASP). In general, ASPs guarantee that the software will be installed and maintained at a high level of efficiency and take responsibility for installing upgrades as they become available. This significantly eases the practice’s administrative burden and may eliminate the need to hire highly skilled IT staff and to update hardware.

A new kind of company, a business service provider, has emerged as an “ASP plus.” A BSP will assume responsibility for virtually all practice financial services. They provide not only technology, but also integrated back-office operations such as claims production, payment posting, electronic payroll and collection services, and detailed monthly reports showing trends in claims payment and office productivity.

BSPs screen dozens of available vendors to find the best technology, integrate it, and use it to drive improved financial and workflow performance in the practice. BSPs offer regular performance feedback, so they can continue over time to improve practice efficiency and improve revenues.

Whether a medical group decides to manage the function in-house or turns to an outside consultant, improving the revenue management cycle is critical. Because of the scope of the problem, acquiring advanced technology is the only way groups can effectively cope with the continuing financial squeeze caused by decreased fees and rising operating costs.

John R. Thomas, MBA, is president of Dallas-based MedSynergies, which provides financial and technology services to medical groups. He can be reached at jthomas@medsynergies.com.

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