Hospital revenue cycle operations: Opportunities created by the ACA

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Fifteen cents of every US healthcare dollar goes toward revenue cycle inefficiencies.1 Of the $2.7 trillion the country spends annually on healthcare, $400 billion goes to claims processing, payments, billing, revenue cycle management (RCM), and bad debt—in part, because half of all payor-provider transactions involve outdated manual methods, such as phone calls and mailings.2 With passage of the Patient Protection and Affordable Care Act (ACA), the US government signaled an intent to move healthcare toward a more consumer-driven model, which will entail a corresponding evolution in hospital revenue cycles. Given the already unprecedented pressures on those cycles from recent increases in patient liability and the decreased ability of many individuals to pay even modest balances (due to ongoing economic conditions), it is clear that robust revenue cycle performance will play an increasingly important role in providers’ financial health.

What does robust revenue cycle performance mean? At the highest level, revenue cycle performance should be evaluated along two dimensions: how much does the revenue cycle cost, and how much does it collect? To date, considerable emphasis has been placed on cost; however, an overall cost-to-collect number3 is too blunt an instrument to reflect the true efficiency of revenue cycle performance.4 More important, a focus on cost distracts attention from revenue and yield,5 the second dimension along which revenue cycle performance should be evaluated.6 The size of the resulting missed opportunity should not be underestimated.

Health reform will expand access to care; however, it will also add complexity, as will current market trends (e.g., more pre-authorization requirements) and other new government requirements.7 These forces, along with the growing consumer-driven nature of health-care, will require that providers not only compensate for their historic underinvestment in revenue cycles,8 but also identify where to invest to innovate for strategic differentiation with payors, physicians, and patients.

In this paper, we outline the key implications of US health reform for hospital revenue cycles and then discuss the associated imperatives for success.

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  1. Finn P, Pellathy T, Singhal S. US healthcare payments: Remedies for an ailing system. McKinsey on Payments. April 2009.
  2. In the retail industry, by comparison, payment transaction costs are 2 percent of every dollar, and less than 1 percent of transactions involve exceptions to the automated payment process.
  3. Although variations in the cost-to-collect clearly reflect differing levels of efficiency, the lack of a standard definition of what costs should be included also contributes. For example, Hospital Account Receivable Analysis (Aspen Publishers) does not include health information management in its calculation of the cost-to-collect, despite the fact that health information management is widely considered to be a revenue cycle function. In fact, “most organizations only include the departmental budget of the business office in their cost to collect.” (HFMA. Understanding your true cost to collect. Healthcare Financial Management. January 2006).
  4. While the cost-to-collect is one overall measurement of efficiency, it does not address opportunities for process optimization and automation. For example, adding an FTE to audit patient registrations prior to billing would increase the cost-to-collect, yet it could also significantly decrease rework and manual intervention later in revenue cycle.
  5. Yield (the capture of accurate payment of amounts due to a provider for services that were indicated and performed) should be seen as the “quality” output of revenue cycle processes.
  6. Yield is typically measured as “cash received as a percentage of net,” yet this can be significantly affected by payor mix, limiting the ability to evaluate and compare performance. Other metrics typically focused on by hospital leadership (such as days in A/R or denials) are significantly influenced by accounting policy, payor or acuity mix, and nonstandardized definitions, which also limits the ability to benchmark performance.
  7. A steady stream of government compliance requirements (e.g., the new MS-DRG system, which has expanded the number and levels of codes; ICD-10 transition; and HIPAA v5010) and increased scrutiny for fraud (e.g., introduction of the Medicare Recovery Audit Contractor program) are also driving the need for more robust RCM capabilities.
  8. Most hospital CIOs have prioritized clinical/EHR software upgrades, thus delaying the replacement of RCM systems; less than 1 percent of hospital CIOs surveyed by HIMSS named RCM as a priority (HIMSS 2010 and 2012 leadership surveys).