- With value-based reimbursement and healthcare consumerism taking hold of the industry, provider organizations are under pressure to ensure their healthcare revenue cycle is operating at maximum efficiency.
To effectively track healthcare revenue cycle performance, provider organizations should develop key performance indicators (KPIs), advised Sandra Wolfskill, Director of Healthcare Finance Policy and Revenue Cycle MAP at the Healthcare Financial Management Association (HFMA).
The former healthcare consultant and community hospital CFO recently explained to RevCycleIntelligence.com that starting with top KPIs and expanding to other metrics should provide hospital and practice leaders with a strategic view of how the organization is operating.
“The value that key performance indicators bring to the table is the definition of standard and what you want from it is to be something that allows it to be comparable,” she said.
“When I worked in a hospital, I would look at my financial statements every month and I would look at my days in A/R,” she continued. “I would look at my cash on hand and a bunch of indicators compared to where I was last month, last quarter, or last year. That tells me what I am doing.”
READ MORE: What Is Healthcare Revenue Cycle Management?
While understanding healthcare revenue cycle performance is key to improving, industry-standard KPIs, such as HFMA’s Measure, Apply, Perform (MAP) Keys, also allow hospital and practice leaders to compare their performance against their peers.
“The value of having industry standard defined MAP keys is that with everyone using and applying the same definition, then I can compare not just internally to what I am doing month to month, but what people who look like me are doing,” she elaborated. “I can compare myself to other critical access hospitals, if that is what I am. I can compare myself to other physician clinics or to other large systems or multiple hospital systems.”
“It gives me a broader perspective on where the industry is outside of my own little part of the world,” she added.
Developing the ability to compare healthcare revenue cycle performance on key metrics is what sets KPIs apart.
“Metrics are more month to month to month and key performance indicators, or MAP keys, are strategic and allow me that ability to compare and find out, for example, that the high-performing organizations in today's world have net days in A/R between about 28 and 36, whereas net days in A/R of 50 used to be considered a great number.”
By developing KPIs and comparing performance, hospital and practice leaders can better allocate resources and improve revenue cycle efficiency, Wolfskill stated.
“The advantage of having strategic keys to look at is you can see very quickly if the trend line is going in the right direction,” she said. “If so, life is good. If it is going in the wrong direction, how do I need to shift to try to have an impact within a 30, 60, or 90-day cycle? How do I need to manage my workforce and my resource availability?”
Provider organizations should look to the MAP Keys to start tracking five main KPIs, she suggested. The KPIs are net days in accounts receivable (A/R), cash collection as a percentage of net patient services revenue, claim denial rate, final denial write-off as a percentage of net patient service revenue, and cost to collect.
From hospitals to physicians and ambulatory surgical centers, the five KPIs apply to a wide range of provider organizations, she noted.
Calculating net days in accounts receivable
The net days in A/R KPI shows a provider organization its revenue cycle efficiency. Hospital and practice leaders can develop the KPI by dividing the net A/R by the average daily net patient service revenue, HFMA explained.
Source: HFMA MAP Keys
The information needed to calculate net days in A/R stems from an organization’s balance sheet and income statement.
The industry group clarified that net A/R is the net patient receivable on the balance sheet and it comprises the net of credit balance, allowances for uncollectible accounts, charity care discounts, and contractual allowance for third-party payers. The data needed includes:
• A/R receivables outsourced to third-party entities, but not considered bad debt
• Payments from the Medicare Disproportionate Share Hospital (DSH) program
• Medicare Indirect Medical Education (IME) paid on a Medicare Severity-Diagnosis Related Group (MS-DRG) account by account basis
• A/R associated with a patient-specific third-party settlement
• Critical access hospital payments and settlements
Providers organizations should not include non-patient A/R, 340B Drug Purchasing Program revenue, capitation or premium revenue from value-based contracts, and A/R related to non-patient-specific third-party settlements (eg, payments from Medicaid DSH and Direct Graduate Medical Education programs).
The KPI also excludes payments for “any state or county subsidy, ambulance services, tax and match type assessments, retail pharmacy, post-acute services and physician practice/clinic unless the clinic is a Medicare recognized provider-based status clinic.”
Developing a KPI for cash collection as a percentage of net patient services revenue
The purpose of a KPI for cash collection as a percentage of net patient services revenue is to evaluate an organization’s financial health by understanding its revenue cycle’s ability to transfer net patient services revenue to cash.
HFMA stated that provider organizations can develop the KPI by dividing the total collected patient service cash, which is found on the balance sheet, by the average monthly net patient service revenue, which is on the income statement.
Source: HFMA MAP Keys
The total collected service cash is the monthly revenue from patient service payments posted to patient accounts, including undistributed payments, bad debt recoveries, Medicare DSH reimbursement, and IME payments. The value is net refunds, HFMA added.
Provider organizations should exclude some total collected patient service cash, including patient-related settlements and payments, such as safety-net, Direct Graduate Medical Education, Medicare pass-through, and Medicaid DSH payments. Leaders should also avoid non-patient cash as well as collected patient service cash from ambulance services, post-acute services, and physician practices and clinics unless they are recognized as a provider-based clinic by Medicare.
Tracking two KPIs for claim denials management
Wolfskill recommended that provider organizations follow two KPIs relating to claim denials management.
First, hospital and practice leaders should develop a denial rate KPI. The indicator tracks the percentage of claims denied and shows an organization its payer compliance capabilities as well as the ability of its payers to accurately reimburse claims.
Organizations can calculate the claim denial rate by dividing the total number of claims denied by the aggregate number of claims remitted, HFMA explained. The information is found in A/R and on 835 files and/or paper remittance.
Source: HFMA MAP Keys
For the number of claims denied, organizations should find the total number of processed claims in a month and identify the actionable denials, or denials that could be corrected within the organization to boost reimbursement. This includes payments containing a denial code on payer remittance advice, initial claim denials, appeal denials, and zero and partial payment accounts containing a denial code.
The value does not include denials for non-covered services, patient financial responsibility, and duplicate claims. It also excludes Medicare Recovery Audit Contractor (RAC) recoupments and encounter claims.
Second, developing a KPI for denial write-offs as a percentage of net patient service permits provider organizations to monitor lost claims reimbursement after all appeal efforts and when providers elect to write-off expected revenue.
Hospital and practice leaders can find the KPI by dividing the net dollars written off as claim denials as found on the patient financial system by the average monthly net patient service revenue, HFMA stated.
Source: HFMA MAP Keys
HFMA elaborated that the value for net dollars written off as denials in a month includes denied RAC revenue from failed appeals or neglecting to appeal as well as dollars stated at net.
The average monthly net patient service revenue should be the most recent three-month daily average of total net patient service revenue, which is the gross revenue less contractual allowances, charity care, and doubtful accounts. The gross revenue is not on the income statement, but can be derived from information contained in the statement.
The value includes payments for Medicare DSH and IME, but excludes the following:
• Medicaid DSH payments
• 340B Drug Purchasing Program revenue as long as it is not recognized as a patient receivable in the patient accounting system
• Revenue from state or country subsidies, ambulance services, tax and match type evaluations, retail pharmacy, post-acute services, and practices or clinics unless they are provider-based clinics according to Medicare
• Capitation and premium payments from value-based contracts
Finding operational performance with a cost to collect KPI
To find healthcare revenue cycle efficiency and productivity, provider organizations should create a cost to collect KPI. Leaders can find the rate by dividing the total revenue cycle cost as found on the income statement by the total patient service cash collected, which is on the balance sheet.
Source: HFMA MAP Keys
“The following revenue cycle costs should be reported with their respective functional area’s costs as applicable: salaries and fringe benefits, subscription fees, outsourced arrangements, purchased services, software maintenance fees, bolt-on application costs and their associated support staff, IT operational expenses related to the revenue cycle, record storage, contingency fees, and transaction fees,” HFMA stated.
Revenue cycle costs do not represent hard health IT costs, such as hardware expenses, licensing fees, server expenses, and any full-time equivalent staff that support the systems. The costs also exclude lease and rent costs, physical space expenses, and scheduling if the function is performed in the service departments by their staff.
By starting with basic healthcare revenue cycle performance KPIs can jump start an organization’s journey to financial success, Wolfskill explained.
“Best advice is to take the KPI journey one step at a time and be purposeful in how you identify the key performance indicators that are important for you to start with,” she said.
“Remember, HFMA started with eight and we have expanded to 25,” she continued. “We didn't get to 25 in one day. Figure out what is most important for you and your organization and consistently begin collecting, tracking, and trending the data.”
Once provider organizations have the foundational block of KPI definitions and data collection processes, she suggested that organizations compare themselves with their peers.
“Getting involved in seeing the peer comparisons is another important step that lets you see if you are at the top of the performance level, at the bottom, or in the middle,” she stated.
Whether an organization defines peer groups by state, Medicare contractor region, bed number, or net patient service revenue, understanding how its revenue cycle performs compares to the cycles of its peers will allow leaders to set goals for improvement and remain a market competitor.