1 containing revenue cycle costs. 2 presented by: robert geer senior consultant accelerated...

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Containing Revenue Cycle Containing Revenue Cycle CostsCosts

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Presented By:

Robert GeerSenior Consultant

Accelerated Receivables Management, LTD ‘ARM’

1400 Renaissance DriveSuite 400Park Ridge, IL 60068888-874-1447

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WHAT POINTS WILL WE TRY TO MAKE IN THIS

PRESENTATION?

We should all be held responsible for reducing operation costs.

Cost cutting should be planned, cuttingcosts in a crisis almost always negativelyimpacts results.

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PRESENTATION?The cost of money impacts overall

hospital performance and should be part of the cost-to-collect ratio.

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WHAT POINTS WILL WETRY TO MAKE IN THIS

PRESENTATION?

Cutting costs before the Revenue CycleDepartments are performing well isdangerous. Levels of performance should be set as goals with a time-frame.

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PRESENTATION?

In addition to planning to reach certainperformance goals by certain dates, costcutting objectives, also with timeframes,should be established.

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Overview

Hospitals and other healthcare providers have now experienced a decade of:

•Low Profit Margins

•Increased Compliance Requirements

•Decreased Cash Flow

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HealthCare's Response

Response has often been cost reductions done in a crisis.

Response has often been to reduce staff.

Response has often had a negative effect on financial position.

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What Not To Do

Manage Like I Won’t Be Askedto Reduce Costs

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Plan Cost Reductions

While cost reductions done in a crisis often have negative

effects..

Cost cutting done systematically, can quite ironically, improve

performance.

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Steps to Cutting Costs

Develop a Documented Plan

Measure Costs

Measure Performance

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Where to Look for Revenue Cycle Cost Reductions

Staffing

•Do not look at non-management staff only. In the newer, leaner organization every manager or supervisors should have 12-13 people reporting to him or her.

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Salary Levels in Relationship to Job Responsibilities and Tasks.

Often technical staff, now expensive, is doing tasks that are clerical in nature. Using clerical and reducing technical staff can add up to big savings.

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Compare claims to staffing ratios butremember there are great differences in the quality of claims being downloaded. If your revenue cycle cannot deliver a clean claim to the BusinessOffice your staffing costs will remain high.

Improving the Quality of Claims is the Key to Cost Reductions

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Purchased Services

This is often an area that gets passed overduring crisis cost reductions.

Most Revenue Cycle Departmentshave a significant part of their budget for purchased services.

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Some things to look at in cost reductions in purchased services:

• Ask yourself if the purchased servicecould be done in house cheaper and more effectively.

• Investigate current operations, should can you save money and improve performance by buying services?

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•Look for opportunities to consolidate vendors, fewer vendors are easier to mange and combining purchases might save money.

•Renegotiate contracts at the end of the term. Always get proposal from competing vendors.

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But remember cheaper is not always better.A collection agency that charges a lower rate but under-performs will hurt your organization.

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Keep up on technology.Don’t continue to useold technology thatmay be both performingpoorly and using morehuman resources than necessary.

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Measuring Costs

Cost-To-CollectCost-To-Collect

The ability to know how The ability to know how much it is costingmuch it is costing

to collect is a critical to collect is a critical efficiency indicatorefficiency indicator..

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Cost-To-Collect Ratio

How is it computed?

Method #1Method #1

Business Office CostsBusiness Office Costs--------------:------------------------------:----------------

Divided by Cash CollectionsDivided by Cash Collections

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Method #2Method #2

Business Office & PatientBusiness Office & PatientAccess CostsAccess Costs

--------------:------------------------------:----------------Divided by Cash CollectionsDivided by Cash Collections

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Using total Revenue Cycle Costs will give you a better idea of the total cost-to-collect however whatever method you choose it is important to use that method consistently.


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A New Way to A New Way to Look At The Cost-Look At The Cost-

to-Collectto-Collect

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In computing costs the cost of money is often overlooked.

The cost of money is critical to many providers who must borrow money to meet cash needs because cash flow from the Revenue Cycle cannot sustain the organization.

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The cost of money is also important to theProvider who does not borrow money but collects

just enough cash to meet daily needs.

How So?

Because that provider is loosing the Because that provider is loosing the opportunity opportunity

to create investment income that wouldto create investment income that wouldbe created from additional cash flow.be created from additional cash flow.

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ADDING THE COST OF MONEY TO ADDING THE COST OF MONEY TO THE COST-TO-COLLECT RATIO THE COST-TO-COLLECT RATIO

PLACES PLACES TTHE IMPORTANCE OF REACHING HE IMPORTANCE OF REACHING

CASHCASHGOALS AT A HIGHER LEVEL. GOALS AT A HIGHER LEVEL.

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Also, remember that increased costs alone do not increase the cost-to-

collect ratio.

Increased Operating Costs coupledIncreased Operating Costs coupledwithwith significant increases in cash flow significant increases in cash flow

will actually result in a lower will actually result in a lower cost-cost-tto-collect ratio.o-collect ratio.

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Let’s look at the table that illustrates various scenarios with understanding the cost-to-collect ratio.

Example #1

No additional cost of money is added to the cost-to-collect, example #1 illustrates the traditional method used to calculate the cost-to-collect ratio.

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Example #2

Here interest expenses are included in expenses. As you can see this additional cost causes the ratio to decrease.

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Example #3

Here expenses were decreased by cutting staff,however cash collections also decreased therebygiving the provider an increased cost to collect.

This is clearly an example of where cutting staffthat resulted in decreased cash flow netted ahigher cost-to-collect ratio.

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Example #4

In this example overall costs increased, however cash flow increased also. The additional cash flow not only allowed the provider to stop borrowing money to meet needs additional cash allowed the provider to invest excess cash and provided interest income.

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The trick here is to measure the relationship of increased costs to increased cash flow.

As a percentage have you seen a greater increase in cash flow than in costs?

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Cost to Collect*

Typical Approach

Expense Category 1400 Renaissance Drivesalary, wages, benefits $178,750 Suite 400purchased services $68,750 Park Ridge, IL 60068supplies $13,750 (847) 824-5510 - Phoneother $13,750 (847) 824-7166 - Faxtotal direct cost $275,000 www.ARMLTD.com

allocated overhead $85,250

total cost to collect $360,250

cash collected $10,800,000

*Cost -To-Collect is determined by tabulating all business office expenses for a given

Cost To Collect Ratio 3.34 period and dividing the figure by the total number of dollars collected during the same

period.Suggested Approach:

Alternative Approaches1 2 3 4

Expense Category

salary, wages, benefits $178,750 $178,750 $176,250 $178,750purchased services $68,750 $68,750 $68,750 $83,750supplies $13,750 $13,750 $13,750 $13,750other $13,750 $13,750 $13,750 $13,750total direct cost $275,000 $275,000 $272,500 $290,000

allocated overhead $85,250 $85,250 $85,250 $85,250

interest expense (income) -$ $8,000 $5,400 -$4,000

total cost to collect $360,250 $368,250 $363,150 $371,250

cash collected $10,800,000 $10,800,000 $10,125,000 $11,800,000

Cost To Collect Ratio 3.34 3.41 3.59 3.15

Assumptions:

1- cash collections meeting operating cash needs2- cash collections not meeting operating cash needs. 3- staff reductions made before performance indicators are met.4- technology / outsourcing enhancements made to increase cash flow

Notes:1- no addition "cost of money" to be added to the "cost to collect" calculation2- interest expense of money borrowed to cover operating needs added to "cost to collect calculation. 3- need to borrow "lost" cash collections. Related interest expense added to total cost to collect. 4- return on additional cash treated as a reduction in total "cost to collect" calculation

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What Does All of This Mean?

Several things:

1. Decreasing expenses in a crisis often means decreased performance which overall, costs the hospital more.

2. If performance increases more than costs, adding costs can be an overall savings to the hospital.

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3. Increased cash flow decreases the cost-to collect.


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So maybe our focus in So maybe our focus in healthcarehealthcare should be should be

more on increased cash more on increased cash flow rather than totally flow rather than totally focusing on expense focusing on expense

reductionreduction..

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Cost of Staff

So you are trying to find a way to calculate how much cash flow you might loose by eliminating staff.

How Can You Do That?How Can You Do That?

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Cost of Staff

Method #1 -- Dollars per FTE

There are 14 managers/supervisor/billers/ follow-up collectors on your staff collection $5,000,000 per month. This means that each person contributes $357,000 per month. If you reduce 1 FTE and do nothing to improve process or technology you can expect a reduction of $375,000 per month in cash flow.

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Cost of Staff

Method #2 -- DRO Model

Your can expect an increase of one day in GDRO if you reduce management/technical staff by 1 FTE. To compute the loss calculate what one day of DRDO increase would mean in reduced cash flow.

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Cost of Staff

We are not saying that you should notreduce staffing costs. Many providers

are overstaffed and need to cut people.

However, don’t fool yourselfHowever, don’t fool yourself..

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Cost of Staff

If you have not:

•Improved Processes,

•Improved Education and Training, and

•Improved Technology

Performance Levels Will Decrease.Performance Levels Will Decrease.

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When Should I Take the Risk and Cut Expenses?

Mostly When You Reach Mostly When You Reach Agreed Upon Benchmarks.Agreed Upon Benchmarks.

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Agreeing to reach certain levels of performance before doing any significant cost cutting, especially in manpower reductions, will reduce your risk of declining future performance.

However, it may be possible to reduce non-staff expenses in the early stages of your cost savings plan.

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Your roadmap should indicate that most of agreed upon performance standards would be met before you attempt to manage the same volumes with less staff, or less costly staff.

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Benchmarks

The benchmarks discussed here are mostlythe same ones used to measure the performance of the Revenue Cycle.

That is the point, only when That is the point, only when performance performance reaches certain defined levels and reaches certain defined levels and maintainsmaintainsthem for some time is it “safe” to them for some time is it “safe” to considerconsiderstaff reductions.staff reductions.

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1400 Renaissance Dr., Ste. 400 Park Ridge, IL 60068

(847) 824-5510 (Phone) (847) 824-7166 (Fax) www.ARMLTD.com

Benchmarks with Recommended Achievement Targets

Benchmark Target Cash Collections 95% of Monthly Net

Revenue Revenue Days 55 Days

Percentage of Discharged Receivable > 90 Days

25%

Percentage of Claims Downloaded to Billing/ Claims Editing System with Errors

95% Error Free Claims

Percentage of Denied Claims

Less than 4% of Gross Billings

Total Uncollectibles Less than 4.5% of Gross Revenue

Bad Debt Uncollectibles

Less than 3.0% of Gross Revenue

Cost to Collect 2% to 3%

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Benchmarks

Cash Recoveries

Setting a cash goal to collect 95 percent of the previous month’s net revenue is the most straightforward method that is easily explained to the organization.

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Benchmarks

Cash Recoveries

Generally, organization that have achieved a benchmark level of collecting 95 percent of net revenue over an extended time period can be safe in assuming that they are maximizing cash recoveries.

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Benchmarks

Days in Receivable

Gross Days Revenue Outstanding is the most commonly used measurement of accounts receivable performance. However, because there are so many factors that can differ from provider to provider the best way to use Days is to compare performance against your own historical performance.

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Benchmarks

Days in Receivable

We would suggest that you achieve less than 65 Days before you consider staffing reductions.

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Benchmarks

Percent of Discharged A/R Over 90 Days

If your percentage is greater than 25% you may have a problem with addressing your “older” A/R. This number, in combination with GDRO, will point to possible issues.

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Benchmarks

Percent of Discharged A/R Over 90 Days

We recommend that this number be at 25% or less. Reaching this benchmark indicates that you are doing a good job of addressing your aged receivable.

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BenchmarksPercentage of Claims with Errors

This is a less common benchmark but is especially critical to staffing levels. Monitoring the percentage of errored claims to total claims is critical to measuring the re-work and manual intervention required by staff.

Re-work and manual intervention are Re-work and manual intervention are the key reasons departments may be the key reasons departments may be

over-staffedover-staffed..

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Benchmarks

Percentage of Claims with Errors

To gather this information, count the number of claims not “passing” edits both in your patient accounting system and in the electronic vendor system.

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Benchmarks

Percentage of Claims with Errors

Process improvements in Patient Access and in Clinical Departments are the key to reducing errors.

As a goal, you should process 95 percent of claims error free.

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Benchmarks


Denied claims are another consumer of staffresources for Patient Accounting. The higherthe denial rate the more staff resources areconsumed “fixing claims” and resubmittingthem.

The difference between a 10 % error rate and a 4% rate could mean a reduction of 1 FTE.

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Benchmarks


Here we would set a 4 percent error rate as a benchmark.

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The Report Card

It is important to keep a “report card” on progress made on each of these indicators. It is also import to share the “report card” with everyone that has an effect on producing a clean claim.

Display the “report card” on offices, in cubicles, and on bulletin boards.

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Conclusion

Cost reductions are coming, too many of us manage hoping this is not true for us.

•Don’t be “caught” without a cost cutting plan.

•Stick to the promises you make in your plan.

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Conclusion

Good management is all in the planning.

Good management is also about the ability to visualize the future and being prepared.

Good management is also about being able to communicate your vision.

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Conclusion

Cost reductions areCost reductions are coming, are coming, are you prepared with a plan to:you prepared with a plan to:

•Improve cash flow,Improve cash flow,

•Improve training and education,Improve training and education,

•Improve processes, andImprove processes, and

•Improve technology?Improve technology?

1 containing revenue cycle costs. 2 presented by: robert geer senior consultant accelerated...

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