Containing revenue-cycle costs - Business - a plan for healthcare providers to cut costs

Healthcare Financial Management, April, 2003 by Robert Geer, Eric Burton

Healthcare providers often have cut operating costs in the revenue cycle without considering the overall impact of revenue-cycle performance on the organization. Organizations that cut staffing, and then experienced a significant reduction in cash collections, actually created an overall negative impact on the financial health of the organization.

However, reducing costs is a fact of life in health care, and if done systematically with an awareness of the broader implications of the revenue cycle's impact on the organization, costs can be reduced. And at the same time, providers can achieve real improvements in revenue-cycle results. Some important steps to begin with are:

* Develop a documented plan to improve results and reduce costs

* Measure costs using a consistent and accurate method

* Use benchmarks to measure performance

Step 1: Develop a Plan

Effective revenue-cycle leaders not only establish goals, but also develop a long-term plan to meet those goals. With a plan in place, cost reductions can be executed in an orderly fashion, rather than as a crisis reaction. Most CFOs can anticipate the need for cost reductions far enough in advance to request input from department managers. With planning, managers can create an effective long-term cost-reduction strategy.

A cost-reduction strategy should take into account two major expense areas: staffing and purchased services.

Staffing. Staff reductions are a necessary part of a cost-reduction plan, but should include both management and nonmanagement staff to maintain cost-effective productivity. Departments should not reduce nonmanagerial staff to the point where managers or supervisors are performing the work of their lower-paid staff. A general rule of thumb for calculating staffing ratios is 12 to 13 staff members per manager or supervisor. With fewer staff members per manager, an organization may become top-heavy and challenged to attain real savings.

Likewise, technical staff members should not perform clerical tasks that could be performed by lower-paid support staff. Volunteers are a cost-effective option for some clerical work. Over a year, the cost difference between a staff of eight billers compared with a staff of five billers and three clerical employees can be significant.

The claims-to-staff ratio should reflect the volume of work. Obviously, a patient accounting department would require more staff to transmit claims to a payer if 50 percent of claims produced by the system must be edited and reviewed before transmission, than it would if only 5 percent of the claims require review and edit. Also claims-to-staff ratios vary among different types of settings, such as hospitals, physician practices, home health agencies, skilled nursing facilities, and dialysis centers.

Finally, outsourcing should be factored into the analysis. Internal staffing levels should take into consideration functions that are being performed by an outside vendor.

Purchased services. Achieving cost reductions for purchased services takes time because new vendors have to be found, new ways of doing business need to be investigated, and new contracts need to be negotiated. Still, most revenue-cycle department budgets include a significant allocation for purchased services. Developing along-term, cost-reduction plan can lead to significant savings in this area. Some key considerations in reducing costs for purchased services are to:

* Determine whether a service could be performed more efficiently and cost-effectively in house or by an outside firm.

* Look for opportunities to consolidate vendors. Fewer vendors are easier to manage, and combining purchases can save money.

* Renegotiate contracts at the end of the term, getting proposals from competing vendors and taking into consideration performance as well as cost.

* Keep abreast of new technology, and avoid retaining or buying old, inefficient, labor-intensive technology.

Step 2: Measure Costs

Costs should be measured in relationship to cash flow. Increased costs coupled with a significant increase in cash flow can drive down the cost to collect. Two effective measures of costs are the cost to collect/cost of money and the cost of staff.

Cost to collect and the cost of money. Using the standard cost-to-collect measurement alone will not provide a complete and accurate measure of organization costs. The cost of money must be factored into the cost to collect to accurately measure the effect of improved or decreased cash flow.

Cost to collect is a critical efficiency indicator. The cost-to-collect ratio is calculated by dividing the cash collected into the department's costs. Total revenue-cycle department costs should be used in developing the cost-to-collect ratio. The cost of money often is overlooked in measuring overall costs. Unmet cash goals are costly to organizations either in the form of a higher cost to borrow money or the loss of a potential investment return. Adding the cost of money to the cost-to-collect ratio emphasizes the importance of reaching cash-collection goals and more accurately reflects department performance. Adding borrowing costs to the revenue-cycle operating costs will penalize the revenue-cycle manager, while adding investment income will provide rewards.