Managing and Enhancing Hospital Revenue Cycles 1

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1 Managing and Enhancing Hospital Revenue Cycles Introduction Though providing high-quality care with improved health outcomes remains the primary concern of hospitals of all sizes, geography, and demographics, money matters. The maxim no margin, no mission applies. The foundation of strong financial health lies in effective management of the hospital revenue cycle. Strong management is the basis of an enhanced revenue cycle. In practical terms, effective management means understanding the process and targeting the core of the revenue cycle in order to fine-tune and support fiscal health and business growth. The processes of hospital revenue cycles are grouped in three areas corresponding to the journey of a patient through the system: the front door, the middle, and the back door. Front-door processes are termed patient access functions and revolve around scheduling, registration, pre-admission, and admissions. When these processes are streamlined and swift, the value is most evident to hospitals customers, the patients, but it is also vital to the revenue maintenance (and enhancement) of the facility. The most effective and efficient time to accomplish patient access activities is when patients and their caregivers are together. Patient access needs to be handled by highly skilled and motivated employees who can accomplish a hospital s goals for information capture while carrying out customer service objectives. This is also the optimal stage for achieving denial management (see Section E below). Middle processes include case management (CM) and health information management (HIM). Those involved in the CM function act as gatekeepers to review the appropriateness of clinic referrals and ensure financial clearance is established. CM also involves developing a plan for discharge and monitoring to ensure it is timely and appropriate to the level of care. Another important focus of CM is the freeing up of acute care beds. The HIM functions revolve around document management, coding, transcription, and charge capture. Financial performance can be significantly improved when case management and HIM activities are optimized by using information technologies that are integrated with process and workflow. The end result can be an increase in revenue and reduction in regulatory risk. For further discussion of risk, see the Risk Management and Compliance chapters in Tab V of this Manual. Back-door processes are termed patient financial services (PFS) functions and revolve around billing, collections, follow-up, and resolution. These are the business office billing and administrative functions that support the front-line caregivers and that interface with Acknowledgements: The technical assistance of Mackenzie H. Marcinko is appreciated in the preparation of this chapter.

2 external payors and patients to resolve outstanding accounts receivable. Back-door processes bring significant value to hospitals by reducing administrative costs, increasing collections levels, and dramatically lowering the percentage of aged receivables. Hospitals seeking to improve their bottom lines through better-managed and enhanced revenue cycle operations in these three areas front, middle, and back usually encounter challenges with people, processes, and technology. This chapter therefore examines ways of enhancing hospital revenues through the following: optimizing organizational structure; raising the bar through benchmarking; and adopting technology.

3 A. Organizational Structure The optimal organizational structure for hospital revenue cycle operations is one in which the leaders (or department managers) of the process areas patient access, case management, HIM, and PFS report to a director of revenue cycle management who in turn reports to the chief financial officer (CFO) of a hospital. It is important to have a single point of executive leadership in order to align the financial goals and objectives, as the 2004 Revenue Cycle Survey by the Healthcare Financial Management Association (HFMA) points out. Results of this annual HFMA survey suggest that it is ideal to have a director of revenue cycle management (although this title varies among institutions). This structure does not increase the total number of direct reports for a CFO, but provides a way to assemble the process areas of a hospital s revenue cycle under the finance arm. In smaller facilities (00 beds and under), the director of revenue cycle management may also fill one or more of the manager positions (patient access, CM, HIM, PFS). A sample job description for a director of revenue cycle management published by HFMA is provided for reference as Appendix. Financial bonus incentives for the director and managers should be based on meeting and exceeding revenue cycle goals, and set and paid out yearly. If a member of this management team vacates the position prior to the end of the financial year, the bonus is not paid out. See also

4 B. Benchmarking As a general rule, comparison of results achieved incites the competitive nature of all human beings, not the least of whom are hospital employees. Add an opportunity for a financial incentive based on results, and a scenario for raising the bar materializes. Healthcare financial executives can access a number of sources for benchmarks throughout the industry: professional associations, the Hospital Accounts Receivables Analysis (HARA) report, vendors, hospital associations, and consulting firms, to name a few of the more robust sources. For example, a 2003 study by Solucient examined national performance benchmarks across four critical areas: quality of care, operational efficiency, financial performance, and adaptation to the environment. The first step is to thoroughly assess each area in your hospital s revenue cycle in order to document the current baseline of performance (e.g., length of stay [LOS], facility admissions, patient days, outpatient visits, in- and out-patient surgeries, staffed beds, etc.). 2 Following that, comparison to the selected benchmark will indicate where your performance sits relative to industry standards. For instance, an industry-acknowledged professional 3 recommends the following targets for different levels of coding expertise: Type Coding Specialist I Coding Specialist II Coder I Coder II Inpatient >45 records daily >32 records daily >23 records daily >5 records daily Outpatients and ERs Ambulatory Surgery 2 min/chart or 250/day 2 min/chart or 250/day 3 min/chart or 60/day 4 min/chart or 20/day 3.5 min/chart or 30/day 4 min/chart or 20/day 6 min/chart or 80/day 8 min/chart or 60/day Management, with active involvement by supervisory and front-line staff, then sets goals. Buy-in across revenue cycle operations is critical to acceptance by all those who will ensure that objectives are understood and that goals are reached and exceeded. Because patient access encompasses the functional areas critical to first pass success of the revenue cycle, it is prudent to focus on activities related to ensuring that all necessary patient information is collected up front accurately and most importantly once. A case study at the end of this chapter, featuring the use of Six Sigma 4 principles and practice, demonstrates the success and follow-on practices of good benchmarking for a centralized production unit (CPU) for one hospital s patient access operations See Also, Aventis Pharmaceuticals provides annual updates analyzing the managed care industry in its HMO-PPPO/Medicare-MedicaidDigest series, available in print and also online at A useful set of self-assessment tools to help you review your processes is provided in a series entitled HFMA Wants You To Know. See Dunn, Rose T. Performance Standards for Coding Professionals. Advance for Health Information Professionals (998). See Six Sigma is a registered trademark of Motorola.

5 C. Technology Adoption Technology plays a key role across revenue cycle operations. By functional area, following are key targets: Patient Access This is the front-end process of a hospital revenue cycle. It is made up of all the pre-registration, registration, scheduling, pre-admitting, and admitting functions. Enhancing revenue cycles in this area requires the following: a call center environment with auto dialing, faxing, and Internet connectivity to quickly ensure and verify all pertinent information that is key to correct and timely payment for services rendered; Master Person Index software to eliminate duplicate medical record numbers and assist with achieving of a unique identifier for all patients; registration and admission software that scripts the admission process to assist employees in obtaining required elements and check that insurer-required referrals are documented; denial management definition, including focus on how to obtain all the correct patient information up front while the patient is in-house; and imaging of data up front. Case Management This function is usually part of the middle process similar to Health Information Management. This area generally requires a case management information system. Health Information Management another middle process of a hospital revenue cycle and is often still referred to as Medical Records. This area is made up of chart processing, coding, transcription, correspondence, and chart completion. Better control of revenue cycles requires the following recommended technology: chart-tracking software to eliminate manual outguides and decrease the number of lost charts; encoding and grouping software to improve coding accuracy and speed and improve reimbursement; auto printing and faxing capabilities; Internet connectivity for release of information and related document management tasks; and electronic management of documents. Patient Financial Services This is the back-end process of a hospital revenue cycle. The operations include all business office functions of billing, collecting, and follow-up postpatient care. Recommended technology to optimize these functions includes the following: automated biller queues to improve and track the productivity of each biller; claims-scrubbing software to ensure that necessary data is included on the claim prior to submission; and electronic claims and reimbursement processing to expedite the payment cycle.

6 Auctioning Debt As a sign of the contracting economic times, some struggling hospitals are using a new method to collect revenue: the Internet. It has become a channel to cut writeoffs and bad debt ratios, which lower stock prices if publicly held. Rather than simply hiring agencies to collect patient bills, hospitals have begun to put their accounts receivable (ARs) up for auction online. Bidders on the debt include the same agencies that serve the hospitals, some of which provide guaranteed payments to hospitals in exchange for access to the debt. The auctions are also attracting other companies that buy the debt outright. One practice used to auction debt is for the hospital to determine the criteria they will utilize for selecting the debt that will be auctioned. The criteria generally focus on ARs that are a certain age, but demographic regions, legal accounts, and monthly payment accounts could also be considered. Once the criteria are determined, a listing of accounts is generated and supplied to potential buyers along with a Request for Proposal that asks each potential buyer to provide information on their experience in servicing hospital-type ARs, as well as details of their expertise, collection techniques, references, and price. Usually the winning bidder will pay a flat price for the entire AR. It is important for the hospital to understand that when auctioning ARs the winning bidder owns the accounts and their collection tactics will not necessarily comply with the hospital s standards for collections. Automation can lead to decreased paperwork, process standardization, increased productivity, and cleaner claims. In 2004, Hospital & Health Network s Most Wired Survey found that the 00 most wired hospitals including three out of the four AA+ hospitals in the country had better control of expenses, higher productivity, and efficient utilization management. Additionally, these top hospitals tend to be larger and have better access to capital. The positive return on investment in technology increases allocation of funding to technology. This correlation is important because it begins to link the investment in information technology with positive financial returns in all areas of a hospital s business, including the revenue cycle. See The Most Wired Survey is conducted annually between January and March to promote the effective use of information technology in achieving clinical and operating excellence.

7 D. Revenue Cycle Performance Evaluation Healthcare organizations and physician practices today face an inordinate number of challenges. It is necessary to ensure that regulatory compliance is met; staff are highly skilled, competent and receive ongoing training; processes are effective; and resources are available to invest in the latest technology and tools. This list names just a few! Revenue Cycle Performance Evaluations are designed for healthcare organizations and physician practices that are interested in measuring their intellectual capital (their staff), evaluating the effectiveness of their processes/workflows, and optimizing existing technology as well as potentially selecting and implementing new technology to enhance their business. The financial data analysis component of the Evaluation will also help pinpoint problematic components of the revenue cycle. In addition, the Evaluation should identify incremental net patient revenue and increased cash flow opportunities, and make it possible to determine the operational changes necessary to achieve them. The review should cover applicable aspects of the revenue cycle from scheduling and patient access, through patient discharge and the coding/billing and account resolution/collection processes. The managers who report to the director of revenue cycle management should be involved in the Revenue Cycle Performance Evaluation process. Performance evaluations should be designed to be minimally intrusive to the staff and business operations. Use a standard data request, such as the one used to collect financial data for state reporting. This will allow you to compare to industry standards, provide a variance report, and highlight areas where the organization is performing well and areas where there is opportunity for financial performance improvement. Interviews with client directors/managers should enable you to develop a gap analysis scorecard based on current versus optimal processes. Following is an example list of who needs to be involved in the Revenue Cycle Performance Evaluation: chief financial officer, chief information officer, director of revenue cycle management, director/manager(s) of patient financial services, director/manager(s) of patient access, director/manager(s) of health information management, director of case management, director of managed care, and charge description master coordinator. The table below identifies that various departments and functions performed in the Revenue Cycle:

8 REVENUE CYCLE DEPARTMENT Patient Access FUNCTIONAL AREA Scheduling Insurance Verification Financial Clearance Registration and Admitting Financial Counseling Eligibility Health Information Management Documentation Flow, Completeness and Timeliness Transcription Timeliness Coding and Abstracting Accuracy Timeliness Discharged Not Final Billed (DNFB) Charge Description Master (CDM) CDM Maintenance Charge Capture Case Management Observation Length of Stay / Avoidable Days Continued Stay Authorizations Clinical Appeals Patient Financial Services Claim Accuracy and Timeliness Accounts Receivable Follow Up Denials Management Contract Management (Payment Accuracy) Cash Posting Bad Debt Collections Customer Service Information Technology Systems in Place, Versions

9 At the conclusion of the Revenue Cycle Performance Evaluation, an executive summary should be prepared that describes: the current state themes regarding people, process, and technology; a review of your known opportunities; a gap analysis scorecard based on current versus optimal processes; a benchmark analysis; a benefits forecast; and a prioritized list of the most appropriate solutions to consider for improvement of the financial position of the organization.

10 E. Denial Management Typically, denied and rejected claims quickly surface as a source of multi-millions in revenue leakage and unnecessary expense. Payors have been struggling with increased costs. They thoroughly inspect claims for errors and have become adept at using their rules to deny and delay claims. Zimmerman reports the denied percentage of gross charges climbed from 4% in 990 to % in 200. In contrast, providers typically lack the tools to aggressively manage current denied claims and prevent future ones. Without denial tracking, an organization may not recognize the heavy financial impact of denied claims. The HARA report indicates that bad debt and gross days are declining. 2 However, a majority of providers write off denials as contractual allowance, distorting the numbers but not the resulting lower margins and reduced cash. H*Works 3 reports that the typical 350-bed hospital loses between $4 million and $9 million each year in earned revenue from denials and underpayments (assume $03 million annual gross revenue and 40% contractual allowance). Recouping lost revenue from denials and underpayments will, according to H*Works, increase an organization s operating margin by 2.6%. 4 Industry estimates report that at least 50% of denials are recoverable and 90% are preventable with the appropriate workflow processes, management commitment, strong change leadership, and the correct technology. H*Works estimates that for a revenue capture of $3 million from denials and underpayments, the recovery infrastructure costs are only about 3%. With all this in mind, better management of rejections and denials, as well as the information necessary to resolve and prevent them, surfaces as probably the best strategy to improving financials. By streamlining the revenue cycle, managing rejections and denials proves to be less expensive and to provide faster returns than initiating new services. Zimmerman & Associates, LLC. Best Practices of Denial Management. Presentation at HFMA Annual Networking Institute (ANI) conference (2004). 2 Petaschnick, Joann. Sr. Editor. HARA. Aspen Publishers. (Fourth Quarter 200). 3 4 For further information, see H*Works (The Advisory Board). Capturing Lost Revenues. Washington, D.C. 200.

11 F. Debt Levels According to Fitch Ratings, bad debt fell among for-profit hospitals during the first quarter of Nonetheless, for-profits still had a higher percentage of unpaid bills than non-profit peers and physicians. For example, bad debt levels as a percentage of revenue fell from 8.4% in the fourth quarter of 2007 to 7.7% in the first quarter of While declining debt is always a good sign, this stands in contrast to physician practices, whose bad debt level is typically in the 5% to 0% range. It is also higher than the debt faced by non-profits that had bad debt levels of 5.5% in Fitch reported bad debt fell among for-profit hospitals partly because of the lower number of uninsured patients being treated at such facilities, as well as more efforts by the hospitals to collect co-payments up front and improve internal and external collections efforts. Caffarini, Karen. AMNews (July 7, 2008).

12 G. Conclusion For several years now, healthcare providers have been challenged to deliver quality patient care in an environment of shrinking profit margins. Total margins and operating margins have followed the same trend. Analysts report that an operating margin of less than 5% leaves an organization without the resources to invest in new technology and capital projects, and will eventually force the facility to close or merge. With rising labor costs, a poorly performing economy, and an aging population, these numbers are not likely to improve soon. Although the industry has seen an overall improvement in accounts receivable days and bad debt for an extended period, it appears that many facilities have reached their peak in addressing these areas, particularly given current demands to reduce staff and other operational costs. So, where is the next major opportunity for reducing costs or maximizing revenue opportunities? Revenue cycle improvement seems to be the most promising and popular area today. PriceWaterhouseCoopers lists five areas to reinvent the revenue cycle: ) organizational/accountability; 2) process/workflow improvements; 3) information systems/management reporting enhancements; 4) quality assurance mechanisms; and 5) department and staff productivity measurements. 2 A thorough re-examination of the revenue cycle process will typically uncover cost drains and revenue opportunities. To succeed in enhancing hospital revenue streams, the topics addressed in this chapter should be explored to achieve the best possible results. Beginning with patient access through HIM to PFS, by applying the optimal organizational structure, benchmarking, and technology adoption, the outcome will be a high performing revenue cycle. 2 Zimmerman & Associates, LLC. Best Practices of Denial Management. Presentation at HFMA ANI conference, (2004). PriceWaterhouseCoopers. What s Hot and What s Not in Healthcare Presentation at South Carolina HFMA conference. (June 6, 2002).