Hospital Revenue Cycles Showing Strength But Risks Include Denials

WASHINGTON, Nov. 14, 2017 /PRNewswire/ -- Hospitals and health systems have been improving important portions of their revenue cycle performance over the past two years but face rising risks from increased denial writeoffs, bad debt, and inefficiencies revealed by their persistently high costs to collect, according to Advisory Board's latest Revenue Cycle Survey.

Notably, a median 350-bed hospital would have lost $3.5 million to increased denial writeoffs from health care payers over the past four years, the benchmarks show. "Across the revenue cycle as a whole, the benchmarks are encouraging and yet show the risks of complacency," said Jim Lazarus, National Partner, Technology at Advisory Board. "Hospitals are facing a combination of reimbursement pressure and a recent acceleration in costs that has outpaced revenue growth, so institutions need to ensure they are receiving payment commensurate with the services they deliver."

The biennial survey of hospital benchmarks shows mixed results across four critical performance indicators:

Denials claw back margins: Hospitals wrote off as uncollectable 90% more denials than six years ago, a difference of $3.5 million for a median 350-bed hospital. The downstream picture also poses challenges: The median for successful denial appeals for hospitals fell from 56% to 45% for commercial payers over the past two years and from 51% to 41% for Medicaid. For Medicare and Medicare Advantage, the rate of successful hospital appeals increased from 50% to 64%. These challenges are likely to persist as an increasing number of denials are based on medical necessity rather than technical or demographic error.

"With denials volume increasing not just for commercial payers but especially for Medicare Advantage, health systems need strategies to address denials proactively," said James Green, National Partner, Consulting at Advisory Board. "The wide range of denials performance among health systems—spanning 3% of net patient revenue between high and low performers—amounts to a $10 million swing for a median 350-bed hospital. Appeals are becoming increasingly difficult, so health systems should focus on approaches such as improved documentation and authorization processes."

Cash flow accelerates but also hints at concerns: In the best news for hospitals and health systems, median performance for net accounts receivable days improved by 8% from 2015 to 2017 (and by 21% since 2006). But these gains may be partially due to writeoffs and other factors that could reduce accounts receivable but pose other challenges for the institution.

Coverage expansion has been reducing bad debt but is offset by the overall growth in patient deductibles: Hospitals in states with Medicaid expansion produced better performance on bad debt but the rise of high-deductible health plans has led to an increase in unpaid patient obligations across all states, regardless of whether the state had Medicaid expansion. This calls for an increased focus on patient collections, especially at the point of service (POS).

The median for collections at POS has risen from 0.24% of net patient revenue to 0.80% over the past six years. For a 350-bed hospital, this is equivalent to increasing collections from $800,000 to almost $3 million. Organizations that collect a higher percentage at POS tend to offer patient discounts for full payment upfront, resulting in a 90% increase in POS collections compared to organizations that do not.

Substantial running room to reduce cost to collect remains at many organizations: The median cost to collect remained flat at 3.0% over the past four years, which may seem like an accomplishment as overall hospital expenses grew by 7.5% in 2017, according to Moody's Investor Service. But costs to collect remain higher than historical benchmarks from 6 years prior. Furthermore, driving down these costs takes on greater importance given the softening hospital margin trends observed in the past 12 months. Despite significant consolidation across the industry in the past two years, many systems are yet to realize the advantage of "centralizable" revenue cycle functions, and are likely missing opportunities to drive down costs and capitalize on knowledge and information sharing across facilities.

The 2017 benchmarks indicate a reduction in centralization of revenue cycle functions revenue compared to the 2008 survey. "While, for example, patient access is difficult to centralize, other functions present good opportunities, such as coding, billing, collections, denials, and payer contracting, especially given their high operational costs for these functions," said Christopher Kerns, Executive Director, Research at Advisory Board.

Given the combined complexity of these challenges—added to the wide further range of responsibilities for Chief Financial Officers— Kerns advises health system financial executives consider delegating oversight of the revenue cycle to a vice president.

Advisory Board honored for market leadership
Recently, Advisory Board was named the No. 1 firm for a revenue cycle category by Black Book for the third year in a row. In 2016 and 2017, Advisory Board led for end-to-end software and technology for hospitals with 100-200 beds and in 2015 for reimbursement, insurance processing and payer management for hospitals with fewer than 200 beds.

In the biennial Revenue Cycle Survey, Advisory Board surveyed senior acute care hospital and health system executives at 90 hospitals and health systems, mostly nonprofit, and nearly 300 organizations provided data through Advisory Board Technologies.  The survey is disseminated and analyzed every two years; the previous survey was in 2015. For more information, visit www.advisory.com/rcbenchmarks.

About Advisory Board
Advisory Board is a best practices firm that uses a combination of research, technology, and consulting to improve the performance of 4,400+ health care organizations. As the health care business of The Advisory Board Company (NASDAQ: ABCO), Advisory Board forges and finds the best new ideas and proven practices from its network of thousands of leaders, then customizes and hardwires them into every level of member organizations, creating enduring value. For more information, visit www.advisory.com.

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SOURCE Advisory Board