The Impact of Hospital and Outreach Laboratory Revenue Cycle Management Incentive Misalignment

Many hospital finance leaders think they are collecting at a higher rate than they actually are since write-offs appear as an adjustment to revenue. At the same time, they try to maximize the value of their revenue cycle management (RCM) technology investments and workforce by requiring the outreach laboratory claims to be handled by the same team and systems as the hospital and health system claims. Oftentimes, the goals and incentives set up for the hospital and health system RCM leaders result in many outreach laboratory claims being written-off, which severely impacts the profit contribution of the laboratory.

Many hospital and health system RCM leaders have goals and incentives focused on the number of claims processed over a certain time period, such as per month. Budgets and team headcount are also often allocated based on the number of claims processed. Therefore, being responsible for processing the high volume of laboratory claims enables the hospital and health system RCM leaders to hire larger teams and justify larger budgets.

However, once the teams and systems are in place, the laboratory claims don’t all get worked because they are much lower dollar volume claims than other hospital and health system claims. Resources are generally prioritized based on the value of the claims, and since hospital and health system claims are often many multiples higher than laboratory test claims, they take precedence. As a result, many laboratory claims go unworked and ultimately are written-off. This prevents the outreach laboratory from providing the maximum available revenue and profit contribution to the health system.

The bottom line is that when laboratory claims, even small-dollar claims, get written-off, the laboratory isn’t getting paid for the work it has completed.

While the electronic medical record (EMR) system, typically used by hospitals and health systems for revenue cycle management, is usually highly automated for RCM, it is not as effective for lower value laboratory claims. This can result in: 

• Many automatic-write offs
• Increased claim denials due to billing practices based on out-of-date rules because hospital and health system RCM teams can lack the knowledge and expertise needed to keep the laboratory rules and configurations up-to-date

The best solution is to have a best-in-class RCM software solution specific to laboratory claims. According to the IDC whitepaper, “Making a Case for Purpose-Built RCM: How Actionable Data and Lab Visibility Benefits Health Systems,” hospital and health systems that incorporate purpose-built laboratory RCM capabilities in their operating model can reap the following benefits: 

• Increase ability to collect on claims regardless of volume, value or complexity while minimizing labor costs
• Improve reimbursements through fewer denials and improved appeals success
• Better mitigation of risk and adherence to compliance requirements
• Minimize labor costs through intelligent workflow automation, configuration and logic specialization
• Enhance financial visibility with machine learning enabled business analytics and visualizations
• Facilitate delivery of lab specific business intelligence to the health system to enable data-driven decision making based on data models with financial referential integrity
• Improve bi-directional data exchange that helps close gaps in care, drives better outcomes, richer engagements, and experiences between laboratories, their patients, and their physician clients
• Mitigate compliance exposure by minimizing clerical decision making through intelligent workflow automation

Making a Case for Purpose-Built RCM: How Actionable Data and Lab Visibility Benefits Health Systems

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While the benefits are clear when evaluating the option to adopt a laboratory-specific RCM system or outsource laboratory claim billing, hospitals and health systems often make the hospital RCM team a decision-maker. When the decision lands with the hospital or health system team, as opposed to the laboratory leadership team, they may opt not to move forward based on the misaligned incentives. They see a risk in “losing” the claim volume contributed by the lab, even if those claims don’t get worked because it is the basis for justifying the human resources and budget allocated to the team.

As a result, one of two things need to happen:

1. Change the metrics by which the hospital RCM team is evaluated, funded, and incentivized, such as profit contribution
2. Remove the hospital RCM team from the decision-making process for how the outreach laboratory claims are billed and collected and allow the laboratory team to make the decision on what helps them best contribute revenue and profit

While laboratories are often a small portion of health system claims, they are ripe with complexities making them labor-intensive and making it appealing for the hospital or health system to overlook or write off small balances in an effort to reduce cost. Doing so is, however, not in the best interest of the laboratory as it leads to sub-optimal laboratory financial performance and compliance risk exposure.