Information systems: financial class vs. insurance plan - healthcare industry

Healthcare Financial Management, May, 1992 by Mike Ulrich

Healthcare financial managers have increasingly experienced changes in the billing requirements and reimbursement methodology of third-party payers. This trend began with the inception of the prospective payment system (PPS) almost a decade ago. These constant changes burden financial managers and their information systems.

Third-party payer pre-certification and authorization requirements, combined with the need for more accurate and effective proration schemes (as well as proper management of payer receivables on a global scale), tax information systems even further.

A need for change

Accounts receivable management is a big priority of most chief financial officers (CFOs). However, almost half of the CFOs respective chief executive officers (CEOs) polled plan to reduce financial support staff in an effort to control costs. With the average gross accounts receivable period at 75 days, financial managers have no choice but to rely heavily on their information systems.

Typically, the hospital information system and its admission-discharge-transfer (ADT) and financial applications have been tailored throughout the industry around specific financial classes--general categories of accounts based on payer type. The financial class category, assigned primarily during the registration and/or insurance verification phase, drives many of the system functions in the management and reporting of in-house, discharged unbilled, final billed, and bad debt accounts receivable areas.

The financial class (generally a one-character, alpha-numeric field) is mathematically limited to 36 categories. However, some information systems hold three to five financial classes in limbo in anticipation of future need resulting from new Federal regulation, new payer type, etc. Financial managers also must use a separate financial class to individually monitor their bad debt collection agencies and attorneys, as well as charity and Hill Burton accounts. All this leaves a limited number of financial classes available to accurately and effectively manage outstanding receivables.

With the advent of managed care, it is not uncommon for some hospitals to have current contractual arrangements with 15 or more health maintenance organizations (HMOs) or preferred provider organizations (PPOs), each having separate billing requirements, patient deductibles, co-insurance, and patient/guarantor dunning limitations.

As a result, hospitals must tailor information systems (and all of the components of the systems) around the more finite insurance plan code instead of the general financial class categorization that dramatically limits user flexibility.

Financial class limitations

An example of the limits of the financial class method is found in the management of the individual HMO and PPO contract. Hospitals generally do not have a coordinator of contract negotiators. As a result, they sign 15 or more contracts with separate billing requirements, separate co-insurance and benefit limitations, separate proration schemes, and separate follow-up parameters.

One hospital located in the Southeast had 17 different contracts, 12 of which had no limitations on sending statements or messages to patients, while five specified that no statements were to be sent to the patient until payment or denial of payment had been received. The receivables managers, along with most of the payers, wanted to set up their information systems to begin sending statements to the patients at pre-set times with the intent of getting the patients involved in convincing their carriers to pay. This was a no-win situation in the context of the financial class system, since 12 of the contracts had to be placed under one financial class while the other five contracts had to be placed under another financial class. This placement was necessary to properly set the statement/message profile, report mechanisms, and the automatic routing of accounts to internal collections and external collection agencies, all with distinct parameters based on financial class.

Insurance plan benefits

While it is true that general financial class categories can be used for reporting purposes, the benefits to basing the information system configuration on the insurance plan level are great. Some of the benefits include:

* Accurate proration and billing

schemes based on insurance plan

and patient type, further defined

by specific pre-authorization and

pre-certification requirements, as

well as individual limits on

revenue codes, condition codes,

occurrence codes, accommodation

codes, and diagnosis and

procedure codes (this includes the

ability to assign free-form text by

insurance plan for unique

requirements);

* Accurate automatic follow-up

parameters and distinct text on

statements and letters, all based

on individual insurance plans;

* Accurate routing of accounts

needing follow-up to individual

collectors by insurance plan;

* The ability to assign flat fee rates

or discounts by insurance plan;

* The ability to set automatic

interim billing parameters by