Strong medicine: rethinking the PFS director's role - patient financial services - includes related article on accounts receivable management

Healthcare Financial Management, August, 1991 by Carol Bradford, Arnold Simoni, Dudley Medlock

Despite policies designed to ensure payments on accounts receivable within 30 to 60 days, averages for the nation's hospitals hover from 75 to nearly 90 days. (a) Hospital executives know only too well the consequences of languishing receivables. At 250-bed St. John's Regional Medical Center in Oxnard, Calif., administrators estimate that a variance of 90 days could create a loss of more than $8 million in annual gross revenue for the facility, which has an average daily census of 200 and average daily revenue of $300,000.

Not surprisngly, the problem mounts as accounts grow older. U.S. Department of Commere figures show that accounts receivable older than 120 days lose more than 20 percent of their value.

In response to receivables problems, hospitals have turned to numerous revenue recovery solutions and collection system strategies. Some of these services involve hiring reimbursement specialists to teach hospital employees effective collection practices. A new healthcare facilities also have chosen accounts receivable financing programs. Because they focus on employees who have responsibility for a facility's cash function, programs, that emphasize management skills and effective collection training come closer to creating long-term solutions to a hospital's receivables problems. But even the best of these efforts may not be enough.

Most collection solutions, including programs that provide some training, fail to address the key issue underlying a healthcare facility's receivables problem. They ignore the role of the person who manages a hosital's cash function: services (PFS).

Directors in name only

A hospital's PFS director may have the same reporting relationship to the chief financial officer (CFO) as other departmental directors within the finance division, but the PFS director may have a lower status within the organization. In many hospitals, PFS departments are equal to other departments only on the organizational chart.

Problems can arise when PFS directors are directors in name only and limited to duties more often performed by lower level managers. In these cases, they may have responsibility for improving collections but lack the influence to make change happen.

The PFS director at one 700-bed teaching hospital in Southern California describes the position's common perception as "more like a supervisor." The difference lies both in the position's function and in perceptions of that funciton.

Because the PFS department significantly affects a hospital's financial succes, some parallels can be drawn between the roles of healthcare PFS directors and treasurers in other industries. While treasurers generally are assigned a broader scope of responsibility than a typical PFS director, both positions are designed to provide their organizations with working capital, maintain favorable relations with outside providers of cash, manage credit and collections, and handle insurance issues. Despite these duties and their fiscal importance, the qualifications for treasurers generally are much more strict and precise than requirements for PFS directors.

By upgrading the PFS function, hospitals could take a decisive step toward solving operational and procedural problems dogging collection management and performance. Many hospitals experience difficulty in measuring the effectiveness of their collection departments because they cannot determine whether collection problems are caused by collection procedures or by the processing functions that precede them.

Managing a billing system also requires that cash flow objectives be met. Inefficient procedures can cause lapses between initiating a bill and receiving payment. As a result, the time value of accounts receivable diminishes.

In a problem-plagued collection department, the following operational and procedural inefficiencies often exist:

* The department becomes involved with problem accounts too late, missing an opportunity for timely payment. A two-week delay at St. John's is estimated to be capable of clogging the system with as much as $4 million in accounts receivable;

* Collection policies may be out of sync with current economic and contracting conditions. If policies are not reviewed and revised regularly, they become outdated and less effective;

* Collection employees receive inadequate and untimely information, preventing accounts receivable from being processed efficiently and accurately;

* Labor-intensive routines, such as write-offs and collection listings, may not be automated. As a result, employees may spend too much time on unproductive activities;

* Collection policies and procedures often are not outlined in a manual and updated to reflect current conditions. Conditions concerning write-offs, charity care, use of outside collection agencies, delinquent accounts, planned payments, and partial payments should be assigned to collection personnel and monitored for effective performance;

* Adequate management goals are not spelled out, precluding objective measurement of departmental performance;