Optimizing claims payment for successful risk management - Statistical Data Included

Healthcare Financial Management, May, 2002 by Janice Frates, Mary Jo Ginty, Linda Baker

By investigating reasons for inefficient claims operations and modifying procedures to address these problems, payers can reduce claims-payment costs.

Disputed claims and delayed payments are among the principal sources of provider and vendor dissatisfaction with managed care payment systems Timely and accurate claims-payment systems are essential to ensure provider and vendor satisfaction, fiscal stability, and regulatory compliance. A focused analysis of conditions contributing to late payment of claims can disclose problems in provider, vendor, or payer operational and billing procedures contracting processes, information systems, of human resources management. Resolution of these conditions equips claims-processing staff with tools to resolve problem claims promptly, thereby lowering costs.

Health plans, self-insured healthcare organizations, insurance companies, and group practices devote considerable time and resources to paying claims. To effectively manage financial risk, payer organizations should know the costs to process and pay all claims. When estimating costs, most payer organizations obtain only an average unit cost per claim by analyzing aggregate claims costs, and fail to identify the much greater costs of handling problem claims, such as those with incomplete or inaccurate information or with disputed payment amounts.

Problem claims typically account for only 10 to 20 percent of claims volume, but they cost far more to process and take two to five times longer to pay Problem claims can increase the average claims payment time beyond regulatory standards, which can subject the organization to possible regulatory action and jeopardize client and vendor relationships.

Claims-Management Setbacks

Ineffective claims management can result in a number of adverse consequences, including:

* Inadequate cash flow;

* Reserve shortfalls and fiscal instability;

* Inaccurate pricing;

* Administrative cost increases;

* Regulatory sanctions;

* Jeopardized provider or client relationships; and

* Accreditation problems.

Inadequate cash flow. Both provider and payer organizations suffer when problem claims delay payments. Medical groups and hospitals increasingly resent payment delays due to problem claims. On the payer side, a sudden increase in the amount of money paid to providers upon the resolution of problem claims looks bad on financial reports and may require the organization to draw upon lines of credit if it has inadequate funds reserved to make payments. Such an increase also can trigger increased regulatory scrutiny.

Reserve shortfalls and fiscal instability. In addition to the cash-flow problems that arise from a high volume of problem claims, a payer organization also may experience a negative "tail" effect on reinsurance coverage if it fails to realize it has met the reinsurer's stop-loss threshold or fails to file reinsurance claims within the reinsurer's time limit. Most reinsurance contracts are for a one-year term plus a "tail" period of three to six months during which the payer organization can submit claims received alter the contract ends for services provided during the contract term. If the payer organization has not booked all of the claims related to a particular member or to its aggregate level by the end of the reinsurance contract, it may not be able to receive reimbursement from the reinsurer for these claims.

Inaccurate pricing. A payer organization's medical loss ratio is the largest component and thus the primary driver of the premium price. The medical loss ratio includes claims actually paid plus those incurred but not reported (IBNR). A high volume of problem claims means IBNR claims are underreported, which frequently leads to an underestimation of costs and inadequate premium pricing. Providers that accept a large share of financial risk without collecting and analyzing cost data adequately also are likely to underestimate their medical costs when negotiating contracts and thus receive inadequate payments from payers.

Administrative cost increases. Problem claims repeatedly cycle through the payment system and cause administrative costs to rise. A claims examiner must review supporting documentation and records of actions for each problem claim and may need to request more information from the provider and consult with a supervisor or the utilization review department before taking action. The increased staff time required for these tasks may force the organization to hire more claims-processing and adjudication staff.

Regulatory sanctions. Claims-payment criteria are mandated by the Centers for Medicare and Medicaid Services (CMS), the U.S. Department of Labor for self-insured plans, and state insurance or managed care departments for commercial products. Provider complaints or negative agency reviews can result in sanctions that increase both the organization's administrative dollar costs and medical cost ratio. Sanctions include fines, more frequent government oversight of claims-payment processes, and mandated increases in claims-payment reserves and working capital. The ultimate sanction is assignment of state regulatory staff or retained consultants to manage the organization's claims operations. The affected organization must pay fees and expenses for retained consultants. Some leading managed care organizations recently have suffered downturns in financial performance as a result of mandated assignment of their claims operations to the state or consultants. (a)