Strong leadership can help avoid nightmares: "hospital overstated revenue: hospital group discovered, corrected $30.7 million error"

Healthcare Financial Management, Dec, 2003 by Bruce A. Hallowell

Healthcare financial executives have nightmares about headlines like the one above. This headline appeared in the Washington Post business section in May 2003. For the first time, not-for-profit healthcare organizations came under the same kind of public scrutiny as Enron and WorldCom when they were forced to restate earnings. Headlines have vilified the healthcare industry for overcharging patients, submitting fraudulent bills, and failing to refund money owed to patients. Now headlines cast doubt on the entire healthcare industry because of the corporate wrongdoings and corruption practiced by a few.

Financial leaders should ask themselves whether their own organizations are at risk for such corporate wrongdoing. Two underlying causes of such problems area breakdown in leadership and the allowance of open accounts receivable (A/R). Senior financial executives can get caught up in the big picture, such as improving their organization's bond ratings and the bottom line. As a result, they may pay scant attention to department operations and the leadership required to ensure a high-quality product.

To avoid becoming part of a nightmarish headline, senior financial executives need to take a strong leadership role in their organizations. This effort begins with factoring receivables as the organization's largest asset. Few checks and balances exist to signal problems in allowance schedules. For years, comparing results from one period with another and trending the results have served as cheeks and balances, but these measures only involve results of calculations; they don't determine whether a problem exists.

Examining past experience to project future value can disclose a major change in contract payment or payer mix. If a third party carrier acquires another large portion of an organization's business from one of its other third-party carriers, senior financial executives should reevaluate their receivables calculation.

Problems arise when individual books of business are viewed as single units rather than as a group. "Too often, senior financial executives delegate these functions to a junior accountant and then look at their summary report. These executives net down the A/R and then add money back in for recoveries of denied claims, bad debt, or future cost-report recoveries.

The Washington Post article motivated many senior financial executives to reevaluate allowance schedules. To follow the schedules through to the final results requires understanding what happened after netting down the receivables. Financial leaders should determine whether they need to add money to the net receivable. And they need to understand what constitutes net revenue and the net receivables on the balance sheet.

Senior financial executives calculate gross A/R days and net A/R days but rarely compare them. Some organizations perform only one of these calculations to save time. Healthcare financial leader's need to understand the critical relationship between gross A/R days and net A/R days.

In the exhibit, the two numbers have crossed, indicating that the net receivable or the net revenue is given a greater value than the gross receivable or the gross revenue. The output of the allowance schedule is used to generate the average daily net revenue to divide into the value net receivable. In some cases, different formulas are used to net down the revenue and the receivables. Then, the future recovery values of written-off receivables is added back in, which increases the values of net receivables with no offset on the net revenues. This calculation also will increase the net A/R days but decrease the gross A/R days.

The opposite occurs when net receivables are undervalued. The key is to observe the relationship of the two numbers. A change in the ratio between the numbers should be a warning. If the numbers cross, a problem exists with how receivables are valued. Receivables are one of an organization's biggest assets. The process senior financial executives use to establish the value of the organization's receivables is at the core of determining profitability. Senior Financial executives need to ensure that the organization values both individual and total receivables.

Healthcare financial executives should not lose sight of the everyday functions they perform. Delegating some of these functions, such as preparing financial statements, to junior staff can lead to some of the problems that make newspaper headlines if the staff does not understand how the revenue cycle works. Evaluating this process requires understanding contractuals and what is critical to estimating the net value of the organization's receivables. The early warning system does not replace strong leadership by financial executives, who are charged with ensuring that the accounting department understands what is going on in the A/R and plays a part in the management of assets. In the changing payment environment, understanding how and when claims are paid is the key to not becoming a newspaper headline.