Managing Cycles Can Boost Revenue

April 15, 2001
Practice Management
John W. McDaniel

One of the most common reasons for poor financial performance in a medical practice is inattention to revenue cycle management, specifically reimbursement systems, billing and collection processes, and accounts receivable. When inattention to revenue management is coupled with declines in income from other factors, it can be disastrous for any physician group. As a result, physicians who manage revenue processes diligently will see improvements in financial performance.

Over the past few years, many physicians have experienced a decline in cash flow for a variety of reasons. Within each practice setting, the increase and complexity of reimbursement regulations requires a different level of expertise among physicians and office staff members. Also, increased employee turnover and more payer scrutiny of claims have resulted in delays of payments by almost all third-party payers. Furthermore, in the past few years physicians have spent more time and money on oversight control, in areas such as medical practice and coding compliance, the federal Health Insurance Portability and Accountability Act requirements, charge validation studies, utilization and referral management, and follow-up on denied claims. While physicians can do little about these factors except apply the necessary management expertise, there are other areas of revenue cycle management that, when managed properly, can help boost income.

Signs of Weakness

If revenue cycle management is weak, for example, physicians will see the following symptoms:
• Aged accounts receivable reports not being managed consistently
• Decreased number of telephone calls being placed to delinquent payers
• Many duplicate claim rejections
• Secondary payers not being billed promptly or payment denials not being followed
• Rising numbers of unanswered letters or other communications from payers seeking more information.

In any medical practice, there are only five areas to address when seeking to improve profitability:
1. Reimbursement systems
2. Billing and collection processes
3. Accounts receivable management
4. Operations improvement
5. Practice growth.

On this list, three of the five areas for practice improvement focus on revenue cycle management. Under the area of reimbursement systems, appropriate coding has been determined to be the single most important area for practice improvement, given that approximately 60% of all physicians undercode. Therefore, implementing a coding compliance program usually leads to revenue enhancement. For physicians who tend to overcode, the implementation of coding appropriateness reviews may lead to decreased audits and a reduced chance of facing civil or criminal penalties.

Another issue related to reimbursement involves physician fee schedules, which typically are inadequate to meet the rising costs associated with practicing medicine today. In particular, fees often are inadequate under managed care contracts since most practices do not know the true cost of delivering patient care and yet try to cover expenses under fee schedules that may not have changed for several years. Therefore, when negotiating managed care rates, physicians should insist on timely payment of claims and get a clear definition of the term “clean claims.” Payers often will use this term to delay payment. What’s more, practices must fully understand risk contract management in terms of global fees and capitation rates in order to ensure that they are not underpricing their services.

While improving reimbursement systems usually results in a quick and positive effect on profitability, the areas of coding, fee schedule analysis, and managed care contracting require continuous monitoring and management if physicians want to see a steady increase in practice revenue.

Billing and Collections

A second area of importance involves the processes used for billing and collections. Physicians should think of this area as being akin to an assembly line that begins with patient scheduling and registration and continues through insurance verification and eligibility, over-the-counter collections of copayments and deductibles, referral management, charge entry, initial billing and follow-up, electronic claims submission, payment posting, self-pay account management, claims denial monitoring and management, and adherence to prompt-payment laws.

Clearly, these processes are critical for any medical practice seeking to generate and maintain consistent cash flow. To shorten the time from bill to payment, physicians may want to send payment notices to patients and copies to the third-party insurer. The notices should tell the patients that the insurance company has not responded and the claim may be billed to the patient if there is no response. Most practices also attempt to contact the insurer’s provider representative when payments are slow. When these efforts fail, however, the practice should report the problem to state authorities.

Facilitating cash flow also requires daily reconciliation of charges and cash receipts through various activity reports. Tools such as online eligibility verification systems and claims scrubbers can help physicians improve the effectiveness of billing and collection systems. Therefore, physicians may want to ask a consultant or accountant to suggest some tools that may help them meet their particular practice needs.

Managing Receivables

The next area for improving the revenue cycle is accounts receivable management. We recommend that each practice segregate its aged trial balance by major third-party payer to determine the number of delinquent accounts over 30 days old. It is easier to contact one insurer regarding 20 accounts, for example, then it would be to make 20 separate inquiries.

Also, when seeking to collect a balance from a patient, if there has been no activity at the end of 90 days, the group should send a final demand letter offering the option of payment in full or letting the patient contact the office to make arrangements for payment. If the physician gets no response within 10 days, these accounts should be referred to a collection agency. Many practices have not developed formal processes for arranging and monitoring patient payment plans.

Since most insurers now require deductibles and copayments at time of service, it is critical that practice office staff make every effort to improve over-the-counter collections. In the average primary care practice, 25% to 35% of income comes from such collections and these small balances can be difficult to collect after the patient visit.

For any business, the expression, “Cash is king,” is unassailable. Therefore, after a practice has addressed the five areas related to improving profitability, it can develop a system to predict cash flow accurately. Cash flow management is extremely important when planning to make large payments during the year, such as those for professional liability insurance, employee bonuses, quarterly taxes, and equipment purchases. To do so, physicians will need to review the appropriate management reports daily, weekly, and monthly in order to preempt any errors that have been occurring and to develop corrective action plans as soon as possible.

Improving revenue cycle management is the single most important business task any physician can undertake. When done properly, it will require physicians to review trending reports for each area of emphasis, set priorities by function and individual for improvement, take specific action steps for each priority, set specific goals and due dates, and possibly establish an incentive system for practice employees who help improve the practice’s financial performance. Once these steps are completed, the physicians can move on to the last step: deciding how to spend or invest the extra cash.