An accounts receivable aging report is a straightforward way to understand amounts owed to companies across industries. But mostly not the case in healthcare. Why not?
Healthcare Providers’ AR Reports are Overstated
Accounts Receivable (AR) reports are generally simple to understand and provide a great snapshot of how much a company is owed. There are usually breakdowns of the amounts owed into categories of 30 days and under, 31-60 days, 61-90 days, and over 90 days. For example, the hypothetical AR illustration below shows a company is owed $50,000 from four customers, with most of it under 60 days.
Although most healthcare providers have AR aging reports like this one, the numbers are meaningless for many providers that use a traditional fee-for-service model. That’s right – the numbers don’t truly represent the real amounts owed. For a healthcare provider, the example above may actually be less than half of $50,000 (e.g., $20,000). Why is that? Well, there is a short answer and a long answer.
The short answer is that healthcare providers’ stated prices for their services (that are placed onto customer invoices and used to generate the AR report) are not the same amount that is contractually owed and will ultimately be paid to the healthcare provider.
The long answer is that healthcare providers are typically paid a different amount for each patient that they see, and most providers don’t readily know what they will be paid in each instance. In common fee-for-service practices, each patient generally has a different insurance plan that has specified rates for every procedure, which are different than the rates of other payors. There is a lot that is packed into that last sentence. The real example below will help further explain this.
The chart above provides actual rates for a Texas hospital for performing treatments on ankle fractures. Contracts with five commercial payors represent prices ranging from approximately $700 to $900.i Medicare is roughly half these amounts, and Medicaid is a small fraction of Medicare. As the chart illustrates, there will be a different amount paid by every single payor. Moreover, commercial payors are very aggressive with denying claims, and ultimate collections from commercial payors average 83% to 92% of the contractual amount.ii In other words, a $700 contractual amount with a commercial payor results in the provider collecting $581-$644, on average.
Accounts receivable reporting for many healthcare providers does not take into consideration the different contractual payment amounts and payment denials. Moreover, standard rates are often used for billing and accounts receivable reporting, which are usually well overstated and can be effectively meaningless.
In this real example, the hospital’s standard rate for treating an ankle fracture (CPT 27786) is $1,264. Therefore, the “sticker price” is roughly 50% higher than commercial insurer rates and multiple times Medicare and Medicaid rates. Let’s put this into perspective with the illustration below.
Assume the following:
- The hospital has 70 patients who were treated for ankle fractures
- The seven payors in the chart above each have 10 of these patients
- Assume write-offs of 12% from commercial payors related to denied claims
Comparing the amount that will actually be collected to the standard rate used for measuring amounts owed is highlighted here.
The actual hospital in this example has annual revenue of over $1 billion. Imagine an accounts receivable report that presents more than double what is owed to a hospital of this size.
How does a healthcare provider know what is really owed to them? Implement a Collections Calculator.
The Healthcare Collections Calculator was a name chosen by CenturyGoal because it is purposely intuitive. It is basically an approach and methodology used to understand what a healthcare provider should expect to be paid for each patient visit. The methodology and approach are to build and maintain an underlying data warehouse of contractual rates of CPT codes for every payor, procedure, and type of physician. This information is linked to each patient based on their insurer (the payor). As a result, the proper contractual amount can be used to calculate what is owed for each patient, and the Account Receivable report accurately reflects amounts that are expected to be paid instead of arbitrary overstated amounts.
Actual collections vs. expected collections are quantified and organized into reasons for shortfalls. This is accomplished by including collections and payment denial data in the Collections Calculator. This information can easily be used to present dashboards of payment shortfalls by reason and payor, such as can be seen in the illustration below.
A healthcare provider that provides mental health services (let’s call it MH Co.) operating in facilities located across the United States was struggling with cash flow and dwindling profits. Accounts receivable is an obvious area to investigate for improving cash flow for determining if there is cash that can be collected sooner rather than later. However, MH Co. had no idea about the true value of accounts receivable. The AR report was generated based on standard rates and, although the CEO knew that the amounts were far overstated, there was no way to immediately ascertain the true values and where there were opportunities for improved collections and profitability.
The Collection Calculator became the solution. It was developed within weeks, addressed the cash flow problem, and profitability promptly and significantly improved.
How the Collection Calculator was developed:
- Extracted a data file of all patient transactions over the last two years
- Developed a data file of payor rates for each CPT code
- Identified the top 10 payors for MH Co. based on transaction volume (making up 85%+ of total transactions for MH Co.)
- Obtained contractual rates data digitally for each of the top 10 payors
- Extracted a data file of collections and payment denial history over the last two years including:
- Denial reasons
- Amount ultimately paid
- Built a data lake containing all this data organized as follows:
- Amount Expected
- Based on the contractual amount assigned to each transaction linked to the patient’s insurer
- Amount Expected vs. Paid
- Reasons for Payment Shortfalls
- Differences between Expected and Paid were assigned to payment denial reasons or just classified as short-pays/no-pays
- Amount Expected
What were the results in under six months?
A collections rate increase from 80% of contractual amounts to 86% of contractual amounts results in an additional $6 million for every $100 million of revenue. The Collections Calculator quickly revealed the “low hanging fruit” opportunities so that this increase in collections happened within six months.
Every healthcare provider should use a Collections Calculator to represent true accounts receivable amounts and easily identify collection shortfalls.
i Rates reviewed for less-populated Texas cities appear to lower than for this large city hospital.
ii The Change Healthcare 2022 Revenue Cycle Denials Index
Meade Monger, founder of Dallas-based CenturyGoal, is an expert in corporate restructurings, transformations and digital strategy. He is currently a PhD candidate in healthcare research.