Developing a Corrective-Action Plan for the Revenue Cycle

Healthcare Financial Management, May, 2001 by Cynthia D. Fry

A corrective-action plan for improving a group practice's revenue cycle should be preceded by a careful analysis of desired outcomes, current performance, and key indicators to be used. The revenue-cycle improvement-planning process should involve all stake holders-physicians, management, and staff. Once goals have been set and key indicators selected, the group practice should perform a pyramid analysis. This analysis takes into account the information system capabilities, work-flow processes, staffing, and organizational structure needed to support the revenue cycle. When the pyramid analysis has been completed, a workable plan can be developed.

The revenue cycle, which is defined as the process of generating and collecting revenue, encompasses appointment scheduling, provider encounters, claim generation, collection efforts, and claim resolution. Both external and internal factors affect a group practice's revenue cycle. Group practices can do little to control external factors, such as payment structures, payment reductions, and regulatory constraints. Internal factors, however, can be more readily controlled to achieve overall financial improvement. Internal factors that affect the revenue cycle include inadequate information system integration and/or underutilized information technology, lack of standardized employee process/task training and quality control, inadequate communication, and the organization's inability to execute change.

Revenue-cycle-related problems that challenge group practices include excessive denial or rejection rates, backlogs in correspondence handling, high number of clays in accounts receivable, high volumes of customer-service calls, and extensive lags between date of service and date billed. To correct and prevent these problems, a well-thought-out, corrective-action plan needs to be put in place. Preliminary steps to devising such a plan include the following:

* Implement a team approach that incorporates the participation of all stakeholders, including physicians, management, and staff;

* Identify desired outcomes;

* Select appropriate key indicators to measure the outcomes;

* Verify the source and integrity of financial performance indicators;

* Document baseline performance for the selected performance indicators;

* Analyze revenue-cycle operations using a pyramid analysis;

* Agree on realistic improvement targets in the key indicators;

* Document the improvement plan;

* Communicate expectations; and

* Monitor and respond to regular performance reporting.

Key Indicators

Key indicators are used to measure both current and ongoing performance. Care needs to be taken, however, to avoid misinterpreting data that can lead to the use of inappropriate indicators. For example, Group Practice A appears to be managing billing and collection operations much better than Group Practice B (see Exhibit 1). When additional information is obtained, however, it becomes apparent that the two group practices age their accounts receivable differently, making comparison difficult (see Exhibit 2, page 62).

Group Practice A ages its billing-system balances from the date billed, with 94 clays between date of service and date billed, whereas Group Practice B ages its billing system balances from the date of service, with three days between date of service and date billed. Also, Group Practice A restarts its aging process when a transfer to another payer class occurs, so that the accounts receivable balances for Group Practice A are inaccurate and are significantly older than they appear in Exhibit 1. When the aging of accounts receivable for Group Practice A is adjusted to start from the date of service, the analysis shows Group Practice A does not manage the revenue cycle as well as Group Practice B (see Exhibit 3).

Comparisons between group practices should not be made until all data are evaluated and understood. Typically, aging decisions and account-balance classification (in the original or the current payer class) are made when new billing and accounts receivable systems are installed. Information decisions include how the billing and accounts receivable information system ages the practice's accounts receivable, whether the system restarts the aging process if a subsequent claim form is generated, and whether the system captures and maintains payer-mix data in the original or the current payer class.

Managers can use crossover indicators (days in accounts receivable and accounts receivable turnover) to help identify data discrepancies. Analyzing and understanding performance indicators is the initial step in determining realistic financial outcomes that could be generated.

Gross collection rate historically has been used as a key financial performance indicator for fee-for-service billing, but this indicator provides little value in measuring financial performance in today's environment. Assuming Group Practice A's gross collection rate is 70 percent and Group Practice B's gross collection rate is 35 percent, both organizations could receive the same revenue amount if Group Practice B has a much higher charge structure than Group Practice A. Gross charges are the key variable in the gross collection rate calculation. Charges vary widely when providers have many discounted fee-for-service contracts, per diem rates, and global rates. Exhibit 4 shows examples of key indicators typically used.