Hospital revenue cycles improving, but denials are up

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Dive Brief:

  • Recycle cycle performance for hospitals and health systems is improving, but there are still major risks. These risks include increased denial write-offs, bad debt and inefficiencies, such as the costs associated with collecting from patients, according to Advisory Board’s recent Revenue Cycle Survey.
  • A median 350-bed hospital lost $3.5 million in increased denial write-offs from payers over the past four years, according to the report.
  • Jim Lazarus, national partner of technology at Advisory Board, said revenue cycle benchmarks are “encouraging,” but they also show “the risks of complacency.”

Dive Insight:

Advisory Board’s biennial survey reviewed four critical performance indicators. The researchers found mixed results. Denials remain an issue for hospitals, which wrote off 90% more uncollectable denials compared to six years ago.

The report also highlights downstream challenges. The median hospital successful denial appeals rate over the past two years:

  • Dropped from 56% to 45% for commercial payers
  • Fell from 51% to 41% for Medicaid
  • Increased from 50% to 64% for Medicare and Medicare Advantage

Advisory Board predicted that denials will remain an issue as an increasing number of them “are based on medical necessity rather than technical or demographic error.”

James Green, national partner of consulting at Advisory Board, said hospitals and health systems need strategies to address denials proactively.  “The wide range of denials performance among health systems — spanning 3% of net patient revenue between high and low performers — amounts to a $10 million swing for a median 350-bed hospital. Appeals are becoming increasingly difficult, so health systems should focus on approaches such as improved documentation and authorization processes,” said Green.

Another issue for health systems and hospitals is cash flow. In a bit of good news, the median performance for net accounts receivable days improved 8% between 2015 and 2017. However, Advisory Board warned the gains may be partially caused by write-offs and other factors, which can reduce accounts receivable and pose other challenges.

In another bit of good news, expanded coverage via the Affordable Care Act reduced hospital bad debt. However, that is offset by more and higher patient deductibles. Hospitals in Medicaid expansion states performed better regarding less bad debt, but high-deductible health plans (HDHP) increased unpaid patient obligations across all states regardless of whether they expanded Medicaid.

A recent Kaiser Family Foundation study found that the average deductible for people with employer-based health insurance increased from $303 in 2006 to $1,505 in 2017.

Advisory Board said the increase of HDHPs shows hospitals and health systems need to focus on patient collections, particularly at the point of service (POS). The report said a median 350-bed hospital could increase collections from $800,000 to nearly $3 million by improving POS collections. Advisory Board added that systems that collect upfront often give patients discounts, which result in a 90% increase in POS collections compared to those that do not offer discounts.

The cost of collections is an issue that continues to plague health systems. The median cost to collect has remained at 3% over the past four years, but that is higher than what it cost a decade ago. Advisory Board said reducing those costs are critical given the softening hospital margin trends in the past year. Health systems have also not realized cost improvements despite consolidation and centralized revenue cycle functions.

“While, for example, patient access is difficult to centralize, other functions present good opportunities, such as coding, billing, collections, denials and payer contracting, especially given their high operational costs for these functions,” said Christopher Kerns, executive director of research at Advisory Board.

Lower reimbursements and inpatient services coupled with a payer push for more outpatient services and patients taking on more responsibility for out-of-pocket costs is causing hospitals and health systems to figure out ways to survive. While Advisory Board mentioned suggestions to improve revenue cycle, some systems have instead decided mergers and acquisitions and divestitures are a better way to go.

Going those routes to improve financial footing has their own set of barriers. For instance, mergers and acquisitions reduce expenses for hospitals, but they can also cut revenue and hurt margins in the first two years, according to a recent report by the Deloitte Center for Health Solutions, in collaboration with Healthcare Financial Management Association.

As the Advisory Board report shows, there is some good news concerning hospital revenue cycles. However, hospitals must continue to improve patient collections as well as reduce payer denials — in a cost-effective manner — if they can expect to remain viable.


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