This is the second post of a three-part blog series focused on key areas of business performance management for pathology practices, hospital outreach programs, diagnostic laboratories, and molecular diagnostic providers. The other blog posts in this series can be found here: Part 1 and Part 3
Below, we have detailed the need for a complete understanding of the drivers behind the metrics you monitor on a regular basis to ensure that you are able to act quickly and appropriately to the changes you identify. We do this with a cautionary note. Does this sound familiar? Every month you review your key performance indicators. You are diligent in your review and monitoring. Everything seems to be moving in the right direction, but something just doesn’t feel right.
Did you know that the metrics you review every month could be misleading?
Understanding the drivers behind the metrics you monitor is crucial to ensuring that you are able to accurately interpret the metric and quickly take the appropriate action.
In this post, we will review several misleading benchmark scenarios. By understanding how these types of scenarios can occur and knowing how to identify them, you can better evaluate the performance of your revenue cycle.
Scenario 1: Benchmarks Falsely Positive—Billed Charges
Your monthly summary of activity, which depicts revenue cycle activity by the date that activity is posted to your billing system, consistently reports the same level of charges, adjustments, and collections every month. This results in consistent net collection rate (NCR), gross collection rate (GCR), net bad debt % (Net BD%), and days in AR (DAR), as shown for months 6-17 in Example 1-A.
Then, one month (month 18) you examine the metrics from this report and see that your NCR and GCR have increased, and DAR has decreased. Typically this would be a welcomed trend, indicating collections are going up because of an increased focus on working your accounts receivable (AR) balances.
While an increased focus on reducing AR that results in increased payments can truly be the driver for this shift in metrics, that is not the only story this shift could be telling. This shift in metrics could actually be misleading when reviewed without the context of the data elements driving the shift. If we add to this picture the actual activity behind these benchmark calculations, you may notice a change, like the one shown in Example 1-B, that is much less positive.
Notice that in Example 1-B, what is actually driving the reduced DAR is a sharp reduction in billed charges. Ending AR is typically comprised primarily of the current month’s charges that have not had enough time to adjudicate, If contractual adjustments are not applied at charge entry then ending AR can be impacted. When billed charges take a quick downward turn in a single month, the impact could be a reduction in AR that creates a temporary reduction in DAR. When DAR is reduced due to lower charges as a result of lower volume, the overall impact to your practice will be a reduction in cash receipts.
Since cash receipts are typically derived primarily from the prior 1-2 months’ charges, a sharp dive in billed charges in a single month is likely to have an impact of increasing NCR and GCR due to payments that continue to be posted from prior months’ activity. While we typically associate an increase in NCR and GCR with increased cash, you can see from the Example 1-B that not only is that not the case in the current month, but the next month is likely to demonstrate an even lower level of cash receipts.
Scenario 2: Benchmarks Falsely Negative—Billed Charges
In exact contrast to the data provided in the first example, an increase in charges can have a seemingly negative impact on NCR, GCR, and DAR. However, if the increase in charges is truly the result of increased volumes of testing in the current period, the long-term impact will be positive for your business.
Here in Example 2-A, it is important to understand what is driving the increased charges. If the increase in billed charges is related to increase volume in the current or most recent period, the shift in metrics will be temporary and will ultimately have a positive impact on your business.
Unfortunately, a fluctuation in billed charges can be created by failed processes or inconsistency of manual intervention. When billed charge fluctuations do not align with volume fluctuations, a deeper understanding of the makeup of those billed charges is necessary in order to fully understand the impact it will have on your business. For instance, if an increase in billed charges is comprised primarily of older dates of service (DOS), the likelihood of those additional charges resulting in cash receipts decreases proportionately to the age of the charges. Work with your billing team to ensure a complete understanding of the cause of fluctuations and to build a more efficient and consistent workflow that will allow for a higher likelihood of collections and more reliable reporting and benchmarking.
Drill-down reporting and collaboration with a robust billing support team are instrumental in understanding if charge fluctuations are specific to certain referral sources, procedures, or payors. Summary reports focusing on each of these areas provide insight into changes in CPT mix, if a specific referring physician has dropped in volume, and/or an increase/decline in payor reimbursement. Understanding the individual drivers of your business, and subsequently, your billing workflow and performance will better prepare you for the resultant fluctuations in metrics and cash flow.
Scenario 3: Benchmarks Falsely Positive—Contract Adjustments
As with Example 1-A above, your monthly summary of activity consistently reports the same level of charges, adjustments, and collections every month. This results in consistent net collection Rate (NCR), gross collection rate (GCR), net bad debt % (Net BD%), and days in AR (DAR) as shown in Example 3-A to the right.
Then, one month you examine the metrics from this report and see that your NCR has increased, and DAR has decreased. It would be reasonable to assume that your collections are going up because of the reduction in your AR.
This is another shift in metrics that can be misleading when reviewed without the context of the drivers behind the metrics. Referencing the table below, you will notice a less welcomed trend than your metrics may initially portray.
As you can see in Example 3-B, the total AR has decreased, as is reflected in the drop in DAR to 39 days, but the reason for the decrease is actually an increase in contractual adjustments.
Likewise, the NCR increased because net charges (billed charges less contract adjustments) decreased when the additional adjustments were taken, not because collections increased.
Unfortunately, in the healthcare industry where the complexities of reimbursement are ever-increasing, and more charges require denial follow-up and appeals, it is not uncommon to see old AR accumulate, followed by some movement toward “clean-up.” Additionally, these sporadic clean-up efforts can lead to great fluctuations in your metrics, creating difficulty in monitoring trends and truly understanding your revenue cycle. Work with your billing team to understand the reason behind these types of fluctuations and to establish processes for more consistent monitoring of old AR balances.
A review of your revenue cycle activity by DOS can be helpful for normalizing fluctuations caused by workflow issues and inconsistent manual processes. When reviewing activity by DOS, remember to allow sufficient time for claims to be adjudicated. For example, if a claim has a DOS of January 25, and your typical process for data entry is 1 week, the claim will not be submitted to the payor until early February. Depending on the payor and the outcome of the claim (payment vs denial or push to patient responsibility for copay and/or deductible), that claim may not be fully adjudicated (balance equal to $0) for three months or longer - May or June, in this example. Depending on the typical timeline for claims to be resolved to a $0 balance for your laboratory, you may need to review activity by DOS on a three to six month lag in order for benchmarks to be meaningful for trending and analysis.
Also, by being familiar with the timely filing deadlines for your major payors, understanding total AR outstanding with each payor by age from date of service can help to identify collectible versus uncollectible AR amounts.
While ongoing monitoring of your metrics should be a priority, be careful how you use those metrics to drive your decisions and activity. As you can see in the examples provided above, metrics alone, when taken out of context, could actually deceive. Instead of reacting immediately, take a moment to fully understand the drivers behind those metrics and what they mean for your business.
Continue reading the "Hidden Landmines in Revenue Cycle Management" 3-part blog series: