Containing Revenue Cycle
Costs
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Presented By:
Robert Geer
Senior Consultant
Accelerated Receivables Management, LTD ‘ARM’
1400 Renaissance Drive
Suite 400
Park Ridge, IL 60068
888-874-1447
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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, cutting
costs in a crisis almost always negatively
impacts results.
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WHAT POINTS WILL WE TRY
TO MAKE IN THIS
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 WE
TRY TO MAKE IN THIS
PRESENTATION?
Cutting costs before the Revenue Cycle
Departments are performing well is
dangerous. Levels of performance
should be set as goals with a time-frame.
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WHAT POINTS WILL WE
TRY TO MAKE IN THIS
PRESENTATION?
In addition to planning to reach certain
performance goals by certain dates, cost
cutting 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 Asked
to 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 nonmanagement 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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Where to Look for Revenue
Cycle Cost Reductions
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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Where to Look for Revenue
Cycle Cost Reductions
Compare claims to staffing ratios but
remember there are great differences in the quality
of claims being downloaded. If your revenue
cycle cannot deliver a clean claim to the Business
Office your staffing costs will remain high.
Improving the
Quality of Claims is
the Key to Cost
Reductions
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Where to Look for Revenue
Cycle Cost Reductions
Purchased Services
This is often an area that gets passed over
during crisis cost reductions.
Most Revenue Cycle Departments
have a significant part of their
budget for purchased services.
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Where to Look for Revenue
Cycle Cost Reductions
Some things to look at in cost
reductions in purchased services:
• Ask yourself if the purchased service
could 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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Where to Look for Revenue
Cycle Cost Reductions
Some things to look at in cost
reductions in purchased services:
• 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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Where to Look for Revenue
Cycle Cost Reductions
Some things to look at in cost
reductions in purchased services:
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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Where to Look for Revenue
Cycle Cost Reductions
Some things to look at in cost
reductions in purchased services:
Keep up on technology.
Don’t continue to use
old technology that
may be both performing
poorly and using more
human resources than
necessary.
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Measuring Costs
Cost-To-Collect
The ability to know how
much it is costing
to collect is a critical
efficiency indicator.
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Cost-To-Collect Ratio
How is it computed?
Method #1
Business Office Costs
--------------:---------------Divided by Cash Collections
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Cost-To-Collect Ratio
Method #2
Business Office & Patient
Access Costs
--------------:---------------Divided by Cash Collections
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Cost-To-Collect Ratio
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 Look
At The Cost-toCollect
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Cost-To-Collect Ratio
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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Cost-To-Collect Ratio
The cost of money is also important to the
Provider who does not borrow money but collects
just enough cash to meet daily needs.
How So?
Because that provider is loosing the opportunity
to create investment income that would
be created from additional cash flow.
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Cost-To-Collect Ratio
ADDING THE COST OF MONEY TO THE
COST-TO-COLLECT RATIO PLACES
THE IMPORTANCE OF REACHING CASH
GOALS AT A HIGHER LEVEL.
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Cost-To-Collect Ratio
Also, remember that increased costs alone
do not increase the cost-to-collect ratio.
Increased Operating Costs coupled
with significant increases in cash flow
will actually result in a lower
cost-to-collect ratio.
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Cost-To-Collect Ratio
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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Cost-To-Collect Ratio
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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Cost-To-Collect Ratio
Example #3
Here expenses were decreased by cutting staff,
however cash collections also decreased thereby
giving the provider an increased cost to collect.
This is clearly an example of where cutting staff
that resulted in decreased cash flow netted a
higher cost-to-collect ratio.
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Cost-To-Collect Ratio
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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Cost-To-Collect Ratio
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
salary, wages, benefits
purchased services
supplies
other
total direct cost
1400 Renaissance Drive
Suite 400
Park Ridge, IL 60068
(847) 824-5510 - Phone
(847) 824-7166 - Fax
www.ARMLTD.com
$178,750
$68,750
$13,750
$13,750
$275,000
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 giv
3.34
Cost To Collect Ratio
period and dividing the figure by the total number of dollars collected during the sam
period.
Suggested Approach:
Alternative Approaches
1
Expense Category
salary, wages, benefits
purchased services
supplies
other
total direct cost
allocated overhead
interest expense (income)
total cost to collect
cash collected
Cost To Collect Ratio
$
2
3
4
$178,750
$68,750
$13,750
$13,750
$275,000
$178,750
$68,750
$13,750
$13,750
$275,000
$176,250
$68,750
$13,750
$13,750
$272,500
$178,750
$83,750
$13,750
$13,750
$290,000
$85,250
$85,250
$85,250
$85,250
$8,000
$5,400
-$4,000
$360,250
$368,250
$363,150
$371,250
$10,800,000
$10,800,000
$10,125,000
$11,800,000
3.34
3.41
3.59
3.15
-
Assumptions:
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cash collections meeting operating cash needs
cash collections not meeting operating cash needs.
staff reductions made before performance indicators are met.
technology / outsourcing enhancements made to increase cash flow
Notes:
1- no addition "cost of money" to be added to the "cost to collect" calculation
2- 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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What Does All of This Mean?
3. Increased cash flow decreases the
cost-to collect.
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What Does All of This Mean?
So maybe our focus in
healthcare should be more on
increased cash flow rather
than totally focusing on
expense reduction.
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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?
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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 not
reduce staffing costs. Many providers are
overstaffed and need to cut people.
However, 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.
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When Should I Take the Risk
and Cut Expenses?
Mostly When You Reach Agreed
Upon Benchmarks.
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When Should I Take the Risk
and Cut Expenses?
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 nonstaff expenses in the early stages of your
cost savings plan.
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When Should I Take the Risk
and Cut Expenses?
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 mostly
the same ones used to measure the
performance of the Revenue Cycle.
That is the point, only when performance
reaches certain defined levels and maintains
them for some time is it “safe” to consider
staff reductions.
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Ben ch m ar k s w i t h Recom m en ded A ch i ev em en t T ar get s
Ben ch m ar k
Cash Collections
Revenue Days
Percentage of
Discharged Receivable
> 90 Days
Percentage of Claims
Downloaded to Billing/
Claims Editing System
with Errors
Percentage of Denied
Claims
Total Uncollectibles
Bad Debt
Uncollectibles
Cost to Collect
T ar get
95% of Monthly Net
Revenue
55 Days
25%
95% Error Free Claims
Less than 4% of Gross
Billings
Less than 4.5% of Gross
Revenue
Less than 3.0% of Gross
Revenue
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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Benchmarks
Percentage 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 the
key reasons departments may be overstaffed.
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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
Percentage of Denied Claims
Denied claims are another consumer of staff
resources for Patient Accounting. The higher
the denial rate the more staff resources are
consumed “fixing claims” and resubmitting
them.
The difference between a 10 % error rate and a
4% rate could mean a reduction of 1 FTE.
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Benchmarks
Percentage of Denied Claims
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 are coming, are you
prepared with a plan to:
•Improve cash flow,
•Improve training and education,
•Improve processes, and
•Improve technology?
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