- Healthcare executives often point to market factors for lackluster hospital revenue cycle performance. But lagging accounts receivable days and shrinking hospital margins usually indicate that it is time for an internal hospital revenue cycle turnaround project, stated Derek Pierce of the consulting firm Healthcare Management Partners (HMP).
“If you’re unable to collect the cash quick enough, that could indicate that management isn’t focused on what’s important,” the HMP Managing Director recently told RevCycleIntelligence.com.
In cases where key hospital revenue cycle performance metrics are declining, he advised hospital leaders to look at internal management processes to start a turnaround project.
“It appears that external forces that are coming at your organization are to blame for the problems,” he said. “And sometimes it is the circumstance like you are in a declining market in a small town. But sometimes it’s not. It should be an internal look; an inward-looking analysis.”
From increasingly more consolidated healthcare markets to sparse patient populations, local market power and geography can impact a hospital’s bottom line. For example, hospitals with more market power in a consolidated market could negotiate higher claims reimbursement rates from payers because of their position in the region. Some payers have also sought hospitals that dominated their market because patients were more likely to go to those facilities.
READ MORE: What Is Healthcare Revenue Cycle Management?
Similar to how competition can produce winners and losers in healthcare markets, a region’s population density can also affect a hospital’s revenue cycle. Rural hospitals tend to face physician shortages, higher uninsured rates, greater uncompensated care costs, fewer private payer options, and lower healthcare utilization rates.
“If you focus on something like the location of your hospital, you have to deal with it and go internal.”
However, focusing on external factors may not help hospitals boost their revenue. Pierce described this hospital revenue cycle management approach as to the gravity problem.
“You can blame gravity for why you haven’t been able to jump 15 feet in the air, but you’re not going to change the gravity,” he explained. “You need to move on. If you focus on something like the location of your hospital, you have to deal with it and go internal to improve as opposed to blaming it.”
As hospital leaders look inward for revenue cycle enhancements, he suggested that executives monitor two key metrics: days in accounts receivable and total hospital margins.
Pierce’s consulting firm uses accounts receivable as their go-to ratio when determining if hospital revenue cycles are off from industry standards. The ratio includes the net credit balances, uncollectible accounts allowances, charity care discounts, and third-party payer contractual allowances, the Healthcare Financial Management Association (HFMA) stated.
“With accounts receivable, although it is hospital-specific with the turn in which they receive payment and there could be an explanation for why it’s high, it’s indicative of a possibly a bigger problem,” he stated. “If you’re not able to take care of the fundamentals and your days are running at 50 or 60 where the norm is 30, it could possibly indicate something bigger is going on in the organization.”
Some major revenue cycle management aspects that can increase the average number of days include high claim denial rates and uncollected patient financial responsibility.
Hospital leaders should aim to maintain accounts receivable days in the high 30s, he recommended. Most hospital chains and for-profit health systems usually use this range as a goal.
In contrast, average hospital accounts receivable days in the 50 range or higher indicate significant management challenges.
“And maybe that wasn’t the case years ago, but there’s been so many consultants and so much technology that have come in, that you really need to ask why you can’t turn it as fast as the others,” he said.
Executives should also track total hospital margins to evaluate revenue cycle efficiency, Pierce suggested.
“The margin could be the operating margin, the total margin, or the profitability ratio,” he stated. “Those are the ones that we go to the most to see whether it’s profitable at the operating level before any types of subsidies might come into play.”
He noted that 3 percent is the magic number for hospital margins. He added, “At 3 percent, it’s almost the minimum to keep yourself reinvesting into new technology and getting that equipment that you need.”
“If you’re not able to keep a 3 percent, you’re not putting money back into the organization. And that’s when it becomes a concern,” he continued.
Hospitals struggling to keep accounts receivable and operating margins around industry standards should start a hospital revenue cycle turnaround project.
According to Pierce, the first step is reducing accounts receivable days. Lowering the average number of days it takes for hospitals to receive revenue is key to financing a more comprehensive revenue cycle management restructure.
“Let’s say you have no cash in the organization to finance the restructuring,” he stated. “How do you pay for the professionals? How do you pay for the turnaround process? Well, you could do that through a reduction in accounts receivable. That’s a one-time payment to pay for your restructuring and to get into what would be the pick-and-shovel work.”
Hospitals can reduce accounts receivable days by identifying which business operations and revenue cycle management components are delaying revenue capture. For many hospitals, patient collections and claim denials are major areas for improvement. Therefore, implementing point-of-service patient collection strategies and improving registration processes could improve accounts receivable performance.
“There’s been so many consultants and so much technology that have come in, that you really need to ask why you can’t turn it as fast as the others.”
Once executives improve their facility’s financial foundation, hospital staff can move on to the pick-and-shovel revenue cycle management improvements.
“That pick-and-shovel work would come from productivity gains, such as looking at each of their departments to determine where there are savings,” Pierce elaborated. “When is the last time you bid pharmacy contracts? Or what is the productivity of the clinical staff? Are they overstaffed on certain shifts? What is the productivity rate in the OR? At a nursing home level, could you use licensed practical nurses or certified nurse assistants instead of registered nurses?”
Exploring each department and service line is about getting to the cost of running the hospital, he added.
Productivity gains will also be critical to increasing hospital profitability. A 2016 Congressional Budget Office report revealed that hospitals would need to boost productivity to the economy-wide rate of 0.8 percent and increase total revenues or decrease costs by 0.2 percent per year to stabilize hospital profitability at a six-percent average profit margin.
However, the government office noted that average annual hospital productivity growth was between 0.3 percent to 0.6 percent between 1996 and 2005.
Ensuring that hospital departments are maximizing spending budgets and leveraging available resources will be crucial to implementing the pick-and-shovel aspects of the hospital revenue cycle turnaround project that will increase profitability.
While the hospital revenue cycle optimization project should primarily center on advancing financial performance, Pierce stated that the entire hospital should start to become more efficient.
“Once you get the financial part of this underway and you get people going in the right direction, other people can jump onto this,” he said. “I have seen spill-over into the clinical side and organizations get that much closer to the patient, which is who really matters. If you eliminate layers of the organization and I’m now four steps away from the patient, that’s a good thing. You are getting everyone in that process and it becomes a grassroots change.”
With both revenue cycle management and clinical staff behind the financial turnaround project, executives should ensure hospital employees have the tools to sustain improvements. Pierce stated that convenient access to data will lead to hospital revenue cycle turnaround success.
“You are looking in your rearview mirror to see how far you’ve come and the fact that these organizations are now looking at data, instead of what feels right,” he said. “They’re looking at benchmarks. They’re looking either internally or externally to find best practices.”
Staff engagement with and knowledge of financial data is also a major sign of success, he added.
“The fact that you’re seeing these are now tools added to their toolkit is a measure of success,” he stated. “When you can walk into a successful organization, they say, ‘I have a 13-week cash flow. I’m managing my clinical staffing. I’m looking at an operational statistic to see what my average length of stay is within a hospital or a nursing home. I have all this, so when you ask for it I know where it is. It’s right on top of my desk.’”
By empowering staff across the organization to embrace the hospital revenue cycle turnaround project, executives can ensure that hospital performance improves and keeps improving.