Marrying technology and process change for improved revenue management: during the managed care heyday of the 1990s, healthcare economists and futurists predicted that bargaining power would eventually shift back to healthcare providers

Healthcare Financial Management, Sept, 2004 by David Greenwalt

Yet here we are in 2004, faced with high denial rates, long collection delays, and shrinking payment. Alas, futurists, like weather forecasters, have limited accountability for the accuracy of their predictions.

Today, payers generally focus their cost-control strategies on aggressive claims management. As a result, healthcare providers face complex payer rules that need to be interpreted and applied during patient scheduling and registration case management, and billing processes.

Healthcare information technology vendors see opportunity in this area and are updating their legacy products to integrate with advanced clinical systems and automate processes in which human error can hurt the revenue cycle. But, to date, the market has not embraced these new solutions. Apparent demand for patient accounting system replacement actually declined in the past year, according to Care Delivery Organization Financial and Administrative Applications Study: 2004 Results, conducted by Gartner, Inc. The study attributes this decline to vendor inability to demonstrate that these new systems are proven and stable. Next generation applications will need to overcome this challenge.

The good news? While we wait for these next-generation applications, there are actions you can take to employ technology and sound revenue-cycle management principles to optimize individual processes.

Current State Review

First, you will want to prioritize efforts. Literally hundreds of processes could be redesigned, so it's important to select those that will yield the most return for your effort. To identify top areas of opportunity, evaluate your revenue-cycle performance using metrics based on processes and payers. Studies by the Healthcare Advisory Board and others indicate that poorly negotiated con tracts, underpayments, and denials each produce roughly the same amount of revenue leakage in an average healthcare organization. Several key metrics can help you evaluate these areas.

Contract profitability by service area. Most health care organizations today own a cost accounting or decision-support system. These tools should be used to evaluate contract profitability by individual service terms whenever possible. Even when the overall contract may be profitable, room for improvement likely exists. Certain services that are not profitable may present opportunities for renegotiation.

Eligibility denials. Denied claims should be tracked by payer and should be summarized by both the number and dollar amount associated with the denial. Further, denial recoveries should be tracked by payer. If the claim is initially denied and later paid, the payer may be using eligibility verification as a stall tactic. Where the denials are not payer specific, but appear to be systemic, a clear opportunity for improvement exists in patient access processes or in patient identification.

Authorization denials. Authorization denials can be grouped broadly based on whether they result from issues related to medical benefits or medical necessity. Studies by the AMA and the Healthcare Advisory Board suggest that 10 to 15 percent of all claims are denied retrospectively by payers because of missing authorization. The Advisory Board further suggests that this number should be as low as 2 percent for healthcare organizations that are employing best practices in case management.

Denials resulting from billing/coding errors. Billing and coding errors typically present opportunities for improvement. A 2002 analysis of 1 million prescrubbed outpatient PPS claims by 3M Health Information Systems Consulting Services showed error rates ranging from 8 to 30 percent.

Underpayments. A high number of underpaid claims or a large aggregate variance between expected and actual payments can mean that payer contract terms are not being met or that the healthcare organization's payment calculations are not correct. Although many payers have moved their cost-control strategies away from complex payment terms and toward aggressive claims management, some payers have not. Also, stop loss and carve-out terms--even when negotiated successfully--are often so vaguely defined that a payer can claim to simply have a different interpretation of the term.

Time to collect. When payment is slow, even when the amount corresponds with what is expected, administrative costs increase. This issue is ongoing even though 36 states have statutes that require prompt payment of claims.

Contract Negotiations

Negotiations should be seen as an opportunity to a fleet both price and process. Reviewing term-level profitability can identify specific clinical services where the base pricing is not covering costs appropriately or where the organization could benefit from a stop-loss term or carve out.

As an example, staff at one Midwestern hospital discovered that even though the hospital's average length of stay (LOS) for normal delivery without complications (DRC 373) was similar to that of other regional facilities, one payer represented a disproportionate share of cases with LOS beyond five days. That payer was also paying a case rate with no provision for outlier cases. By presenting these data to the payer, the hospital was able to negotiate additional per diems for average LOS beyond four days.