Credit balances: spotlighting a little-known area of risk and opportunity

Healthcare Financial Management, Jan, 2004

Credit balances--accounts on a provider's accounts receivable (AR) system that have payments and allowances exceeding total charges--are considered by some to be the "stealth aircraft" of hospital patient accounting. Difficult to identify and tough to resolve, credit balances were until a few years ago the kind of loose ends that hospitals might easily have ignored in the face of other pressing issues.

That's no longer the case. Beefed-up federal regulations in the past six years and increased public scrutiny of financial practices, spurred by recent corporate accounting scandals, have combined to bring the problem of credit balances to the forefront of a CFO's attention. The current emphasis on reengineering the revenue cycle has also made it imperative that hospitals find a way to effectively manage credit balances, which may be distorting your profitability and AR days.

The magnitude of the issue is surprisingly large. A small-to-medium-size hospital with annual revenues of $100 million may generate $2 million of new credit balances each year. With nearly 6,000 hospitals nationwide, more than $8 billion in new credit balances may be created nationally each year.

Given that most hospitals today rely on manual efforts to tackle credit balances, the resources required to resolve credit balance accounts can be considerable. On average, a hospital employee can resolve 1.5 credit balance accounts per hour. That means a 300-bed facility would require a minimum of two FTEs; a larger teaching hospital would require 10 FTEs just to resolve the new credit balances created each year.

Because the credit-balance issue lies hidden in the receivable, some CFOs are unaware of the full extent, nature or magnitude of the credit-balance problem. However, CFOs need to understand this issue because their organizations can be threatened by the associated financial risks and compliance issues. In addition, by not addressing the problem, they are likely squandering billing opportunities and wasting resources by relying on manual efforts alone to resolve credits. CFOs should develop a comprehensive, systematic approach to this ongoing issue, that includes establishing management tools and an ongoing monitoring process.

Causes

Credit balances are created due to a variety of factors that include billing and payment errors, as well as limitations on the part of both hospital and payer systems. Major reasons include:

* Misposted allowances--incorrect estimates of cash amounts due

* Duplicate payments

* Charge credits subsequent to billing

* Full payments by both primary and secondary insurers

* Up-front collections--incorrect estimates of patient liability

At many hospitals, a large portion of their credit balances are not the result of overpayments. Less than a third of the credits that get resolved result in a refund to file patient or payer. Most of the rest--more than half of all credit balances--are misposted allowances that need to be reversed on the patient accounting system but which do not require any refunds. Because of the variety of individual contracts payers have with patients, it's not uncommon for hospitals to have incorrect rates and terms loaded into their systems.

"Many payers have many products and we may expect payment according to the patient's registration. In reality, the payer paid the claim correctly," says Suzanne Tschetter, CPA, Manager of PFS Financial Reporting at the Cleveland Clinic Foundation.

Although such credits do not result in refunds, they do result, in an understatement of a hospital's profitability and AR if not corrected in a timely manner. Of course, accurate documentation is important to indicate why refunds are not necessary.

Oil the payer side, errors occur when a claim is accidentally paid twice, which can happen as a result of manual mistakes, system mistakes, or a combination of both. "One of our payers had a limit on the number of lines in their system on which they could pay out," says Tscheller. The software application would bring down the first five lines of the claim, accidentally pulling in the previous claim. "They were duplicating part of the payment. That was a real challenge to muddle through" because it was so difficult to identify as a cause, she says.

Credit balances also result from better point-of-service collections. "We have a very strong up-from collections program that results in a higher volume of credit, balances," says Susan Phelps, Director of Patient Financial Services at High Point, Regional Health System in High Point, N.C. The 383-bed hospital registers 123,000 inpatients and outpatients a year. "Sometimes we overestimate what they owe. It's really difficult in a managed care environment."

Risky Business

Credit, balances pose real risks, ranging from serious Medicare penalties to wasted time and lost, payment opportunities.

Medicare Penalties

Perhaps the greatest risk of credit balances is suspension of Medicare payments, one of the severest threats to any organization. Non-compliance with federal regulations concerning credit balances can also result ill titles and imprisonment. CMS requires thai hospitals report all Medicare credit, balance overpayment accounts on a quarterly basis using form CMS-838, which must be signed and attested to by an officer of the hospital--specifically, the CFO or CEO.