How Healthcare Organizations Can Protect the Bottom Line, Increase Efficiency by Outsourcing Key Revenue Cycle Functions
Increased patient financial responsibility, difficult patient collections and value-based reimbursement models have presented significant financial challenges for hospitals and health systems. Organizations that do not reengineer their revenue cycle operations to address today's challenges risk leaving revenue on the table.
Few provider organizations have the talent, capital and IT resources necessary to keep pace with a rapidly changing economic environment. Instead, many healthcare organizations have seen value in establishing partnerships with financial service experts and IT providers for improved financial management, freeing up hospital resources and administrators' attention for what matters most — patient care.
Hospitals need expanded revenue cycle management (RCM) capabilities to respond to financial challenges and changing market forces. In particular, they need financial solutions that reduce overhead costs, improve claims processing efficiency and increase coding accuracy, thereby giving hospitals added financial support as they take on alternative payment models.
This article examines factors pressuring hospital CFOs to reengineer their revenue cycle processes, including increased patient financial responsibility and value-based payment models. It discusses trends in RCM outsourcing and finally examines common revenue cycle operating models.
Increased Patient Financial Responsibility is Costing Hospitals
Today, patients with high-deductible health plans face substantially greater out-of-pocket responsibility than 10 years ago. Kaiser Family Foundation reports the average annual out-of-pocket costs per patient rose nearly 255 percent between 2006 and 2016.
The shift in cost-sharing has negatively affected many Americans' ability to pay for healthcare services. Almost one in four non-elderly Americans reported having past-due medical debt in 2015, according to a 2017 Urban Institute study.The same percentage of insured Americans reported being "unsure" if she or he could afford to pay for major medical expenses in 2016.
Hospitals experiencing difficulty collecting payment from increasing numbers of self-pay patients have seen the impact of inefficient collection practices on their bottom lines.
"As consumers shoulder greater financial responsibility for their care, hospitals and health systems are interfacing more than ever with patients to collect," says Scott Law, founder and CEO of Zotec Partners, an end-to-end revenue cycle management solutions and services provider. U.S. hospitals saw an 11 percent increase in self-pay payments between 2011 and 2016, according to HFMA. For many hospitals, a larger share of total reimbursement now comes from patients rather than commercial payers.
The dramatic increase in patient liability has introduced new financial risks to provider systems of all sizes. Higher out-of-pocket costs among insured patients is linked to greater levels of bad debt at U.S. hospitals; about 55 percent of outstanding patient responsibility after insurance results in bad debt at hospitals, according to a 2016 MediRev study.
Moreover, hospital systems have a much lower collection rate from patients than from commercial payers. Hospitals with insured patients who had higher self-pay rates after insurance saw lower net revenue from the third quarter of 2015 to the third quarter of 2016, according to a 2016 Crowe Horwath benchmarking report. In other words, healthcare organizations with payer mixes skewed toward the patient collected less revenue than hospitals with a greater proportion of reimbursement from commercial payers.
Inefficient collection processes can hurt your bottom line
Many hospitals' current payment collection processes are inefficient and costly. Hospitals spend more to collect self-pay accounts than to settle claims with commercial payers. Even hospitals with revenue cycles in the top performance quartile saw average cost to collect patient payments increase from 1.9 percent to 2.6 percent of total amount collected between 2011 and 2013, according to McKinsey & Co.
Paper-based collections processes, which many hospitals still use, represent another source of wasted time and money. Paper-based collections involve material costs such as paper and stamps, in addition to the inherent labor costs as the process involves more employee time.
Hospitals are investing more resources in revenue cycle operations and collection efforts without gaining a comparable increase in net patient revenue. As healthcare providers engage in more complicated payment models, optimizing collections and other fundamental financial processes is crucial to maintaining financial solvency.
"As industry finance leaders become more technologically savvy, there's an opportunity for hospitals to seriously reduce operating costs through increased RCM efficiency," Mr. Law says.
Increased pressure to optimize
The move to value-based payment is expected to remain steady or intensify in coming years. Hospitals and health systems predict at least 30 percent of their revenue to fall under value-based contracts by 2018, according to an HFMA survey.
As hospitals engage in more alternative payment models, rural and urban-based CFOs are concerned their organizations may not have the financial capabilities in place to manage the transition. In fact, nearly 40 percent of healthcare financial leaders do not believe their organization currently has the capabilities they consider "extremely important" to succeed under value-based medicine, according to HFMA. These important capabilities include interoperability and access to real-time data.
"When assessing their organization's core competencies, many hospital leaders are realizing they do not have the expertise or resources in-house to handle the regulatory and administrative demands of value-based or risk-based payment models," Mr. Law says.
"As hospital leaders look to the future, it's apparent administrators must find ways to be more financially efficient as well as financially skilled."
CFOs across rural, community and urban hospitals are feeling the pressure to ensure their organization is financially equipped to remain cost-effective and risk-savvy as they hedge into value-based reimbursement models. For many leaders, this means retooling their revenue cycle departments to function as strategic business units driving organizational success. Hospital CFOs are turning to the financial services market for additional support.
CFOs are engaging alternative revenue cycle management models
The number of IT vendors and consulting companies offering revenue cycle services has exploded in recent years. The sheer number of operating models and management options can be daunting for hospital administrators searching for the right financial partner.
"Revenue cycle management structures are not one-size-fits-all," Mr. Laws says. Hospitals with different bed counts and different demographics have different financial needs. Mr. Law outlined three common revenue cycle management models healthcare organizations are engaging to optimize their financial performance.
I. In-house. Some hospitals choose to update their in-house financial management system to improve financial performance. "Keeping revenue cycle operations within the hospital system gives administrators greater control over day-to-day operations," Mr. Law says. "The key is to find an end-to-end solution that can automate manual processes and talented RCM staff who can drive department efficiency."
II. Fully outsourced revenue cycle. The majority (94 percent) of hospital CFOs believe implementing updated financial systems would improve their organizations' financial health and increase revenue cycle efficiency, according to Black Book. But 48 percent of financial leaders said limited budgets in 2017 could prevent them from implementing the end-to-end financial systems they believe they need to succeed under changing reimbursement structures. This rings particularly true for smaller and more rural healthcare systems that lack the deep pockets of their larger, urban peers.
Fully outsourcing revenue cycle operations to a third-party firm is a cost-effective way healthcare providers can quickly improve financial performance. In this model, the outside party assumes responsibility for all revenue cycle management processes, including claims processing, denials management, cash posting, A/R follow-up and account resolution.
"Using Zotec Partners for our revenue cycle management needs, we can focus on patient care, while they seamlessly direct our revenue processes across our large infrastructure," says Kevin Lenahan, senior vice president, CFO and chief administrative officer at Atlantic Health System in Morristown, N.J.
Zotec Partners is the largest privately-held revenue cycle management firm in the United States. The company offers an advanced end-to-end revenue cycle management solution that can help healthcare providers reduce operating costs by automating manual processes.
Zotec's solution uses sophisticated algorithms to extract clinical data from an organization's EHR, mine patient's demographic information from registration materials and apply machine learning to assign ICD-10 codes reflecting both the medical care administered and acuity of the patient's condition. The platform files the insurance claim directly with the payer and receives instant feedback regarding incomplete claim adjudication or denials.
Healthcare providers can choose how they use the solution to address their particular needs. Organizations can automate and outsource the entire revenue cycle process or just select revenue cycle processes.
"[Zotec] provides the software and the process, while the healthcare provider has the option to supply the staff," Mr. Law says.
The majority of hospitals outsourcing financial services have seen measurable improvement to their bottom lines. For instance, 78 percent of hospitals with fewer than 200 beds attributed 6.2 percent of their revenue increases to the decision to outsource all or most of their RCM operations, according to the Black Book poll.
III. Hybrid revenue cycle model. Many hospital systems use outsourcing to fit their organization's short-term needs. Employing third-party services or automated solutions to improve efficiency in select processes can help organizations maintain high-quality financial performance while they complete major capital investments or enterprise-wide IT installations.
The number of hospitals employing outsourced solutions for key revenue cycle functions increased nearly two-fold between January 2015 and August 2016, according to Black Book. Processes most commonly outsourced included collections, account resolution and denials management.
Some hospitals choose to outsource less common but more resource intensive revenue cycle processes, such as complex claims management. Complex claims — claims typically involving motor vehicle, workers' compensation, injury, catastrophe and general liability cases — present a mixture of challenges for a hospital's billing and collections staff, who may lack experience in dealing with non-traditional payers.
The proportion of U.S. hospitals outsourcing complex claims to a specialized provider climbed from 20.4 percent of hospitals to nearly 40 percent of all hospitals between 2015 and 2016, according to Black Book. Of those hospitals choosing to outsource complex claims, 77 percent said their internal revenue cycle department realized gains in productivity and efficiency.
With today's healthcare organizations focusing more on quality of care and improving outcomes, hospital leaders must manage their capital and human resources carefully to handle vital business functions. Third-party financial institutions offer an undeniable value-proposition to nonprofit and for-profit hospitals hoping to expand their financial capabilities. Investing in a financial service partnership is a strategic way to stay on track. With the right financial partner, hospitals are free to focus their time and money on what counts — the patient.