Spinning straw into gold smarter bad debt management: Meridian Health overpaid one collection agency $97,000 in fees, and that was just one reason to improve its bad debt management

Healthcare Financial Management, March, 2007 by Marilyn A. Koczan

With razor-thin margins, healthcare providers are beginning to tap a once overlooked area of revenue potential: bad debt management. Hospitals generate more than $25 billion a year in uncompensated care charges, which include bad debt. This figure is expected to rise as healthcare costs continue to grow, the numbers of uninsured patients increase even as unemployment decreases, and the insured face higher out-of-pocket obligations.

Problems with bad debt management exist in operational inefficiencies, communication with and tracking of collection agencies, and control over debt policy adherence. Technology can help providers reduce these problems, but the healthcare industry has also been slow to adopt technology and methods that have been proven in the consumer credit and finance industries.

Assessing the Problem

Meridian Health, a not-for-profit health system serving central New Jersey, struggled with these same limitations in bad debt management. In 2004 alone, bad debt cost totaled $30.5 million out of net patient service revenue of $678 million, and accumulated annually. Much of the bad debt was considered uncollectible, and systems did not exist to delete accounts or determine when collections efforts were exhausted.

A merger left the organization working with 10 collection agencies. With no monitoring tools, Meridian had no clear-cut way to determine which agencies were delivering the best return on bad debt investment. Even among agencies that sent performance reports--and several didn't--the reports did not allow an apples-to-apples comparison.

Invoices from collection agencies were paid without a way to verify their accuracy. A voucher for payment could include thousands of accounts, but without automated systems and adequate staff, Meridian had resources to check only payments of $1,000 or more.

A staff member once found a $1,000 "payment" sent from an agency that was actually an allowance. This discovery led to a full-blown audit of the agency. Meridian found that in one year alone, it had overpaid the agency $97,000 in fees. Although it was believed that the mistakes were not fraudulent, managers realized that the errors they had discovered resulted from an accounting system that lacked the ability to detect and prevent these types of errors and possibly others.

Taking Action

After discovering the errors described above, Meridian conducted a study to compare the financial impact from remaining with the existing accounting system against the cost of deploying a new debt management system. The results suggested that deploying a new system was more cost- effective.

After selecting the system (with appropriate due diligence), Meridian contractually obligated each of its collection agencies to install the system's agency software and connect in real time to Meridian if the agencies wanted to continue working with the health system. Agencies were connected to Meridian's debt management system one at a time, starting with the primary agencies. Because most of the agencies did not have in-house technical expertise, Meridian's IT staff provided implementation and support. Deployment across the agencies took one year, at a cost of $236,000, which included support for a full-time IT engineer, plus $250,000 in annual operating expenses.

The next steps for Meridian were to fully implement the new debt management system by focusing on three areas that would provide the means for improvement:

* Rules-based workflow to control compliance with policy and procedures

* Agency management and monitoring to track and enforce compliance

* Integration of analytic technologies to manage recoveries

Rules-Based Workflow

To establish rules-based workflow management capabilities, Meridian needed first to define its collections work flow processes, policies, and procedures, including communication and data exchange with agencies and all tracking and reporting needs. The health system translated work flow policies and procedures into rules, and scripted the rules into the debt management system, thereby automating its policies and procedures for consistent execution everywhere in the organization.

One example of a new automated policy was in account management. Meridian's policy is to give primary collection agencies 180 days to collect an account. After that time, agencies are supposed to send accounts back to Meridian to be forwarded to a secondary agency. The new system disclosed that only one agency was complying, while the others were holding accounts and not working them for up to three years.

Meridian automated this policy in the new debt management system to enforce agency adherence. As a result, accounts were sent to secondary agencies according to the policy. Secondary recoveries increased and double charges were eliminated. In the first year, Meridian recovered $1.3 million in secondary revenues, and today the health system continues to enjoy more than $1 million in additional revenues annually.

Another example of a new automated policy was in patient payments and agency referrals. Meridian's policy was to not accept agency charges for patient payments received within 15 days of the agency referral. In this 15- day period, the agencies wouldn't have had a chance to work the account, so any payments would be a result of the hospital's own activities. The ability to automate this rule and monitor the exact date of payment and agency referral on an individual account level enabled Meridian to enforce the 15-day policy with all its agencies and generate $285,000 in savings in the first year.