Relative Value Price-Performance Calculation for Outsourced Electronic Medical Billing Service
Internet-based technology has been applied effectively to reduce medical billing costs, especially at the stages of electronic submission and scrubbing.
However, excess focus on reducing costs of individual process components while ignoring total billing quality exposes medical practice to significant financial downside.
Quantification of billing quality and its inclusioninto price-performance equation of billing service yields more comprehensive financial picture and better decisions about billing service selection and its management.
Such an approach also results in substantially higher remittance and better regulatory compliance.
It is effective, however, only subject to billing performance guarantees and transparency.
Traditional sequence of management steps to rationalize medical practice billing and reduce its costs requires the physician to invest in processes, personnel, and technology:
Assuming three FTE's working the billing and using Vericle's technology, the costs would be about $120,000 for personnel and $36,000 for technology.
For reference, Vericle technology performs comprehensive claim validation, patient demographics and eligibility test prior to visit, electronic claim submission, and comprehensive reporting for followup etc.
Additionally, using Vericle technology, 98% of claims are now clean, adding further value for the investment in claims processing technology.
In this case, billing costs add up to $156,000 annually.
This is a significant accomplishment in terms of billing processing costs, because without advanced technology, the same practice may need at least seven FTE's, at cost of $280,000.
Accordingly, the previous arrangement prior to installing the Vericle technology costs at least $292,000 (assuming 1/3 of cost for an alternative albeit inferior billing package).
Thus, an investment of $36,000 in superior technology saved at least $136,000, which is obviously an impressive ROI on $36,000.
However, this approach does not account for the entire spectrum of costs associated with in-house billing approach.
It ignores the total revenue aspect of the billing function, which is its ultimate purpose.
Quantification of Losses Caused By Insufficient Billing Process Quality To receive a more comprehensive perspective, let us compute the total losses of this approach generated by uncollected payments.
We will proceed by establishing a convenient baseline and figuring out a way to approximate the losses.
In our experience, the likelihood of payment shrinks dramatically with time.
With few exceptions, the unpaid claims for more than four months are eventually forfeited.
Hence the importance of A/R beyond 120 days.
Therefore, to compute the total losses we must start with computing the total revenue and then use the days in accounts receivable as a proxy for the underpayment.
For the case study in hand, we estimate the total practice revenue by assuming average physician revenue of $300,000, which, for 17 physicians, adds up to a total of $5,100,000.
Next, since the stated percent of clean claims for electronic submission is about average (98%), we will also assume an average nation-wide A/R beyond 120 days, which currently stands at about 17.
7% (Lowes, 2004).
This number indicates that the amount of losses on the billings of $5,100,000 approaches $902,700.
Even if 40% of that A/R were eventually collected, we would still face a revenue loss of $541,620 .
Therefore, while the practice saved $136,000 on personnel, it still lost an estimated $541,620 on billing quality despite the newly installed technology.
The lesson of this illustration is that the costs of billing function may be grossly underestimated because of the following common pitfalls: Pitfall #1: Focus on costs of individual components of the billing function instead of computing the bottom line cost to the practice.
Pitfall #2: Underestimate the costs of these components such as benefits, sickness, management, replacement, education, and vacations in case of personnel costs.
Pitfall #3: Focus on the numbers or quality of claims instead of billed and paid numbers of dollars.
An alternative, bottom-line oriented approach, guarantees improved revenue before spending a dime:
This approach aligns the interests of the biller and of the physician and results in dramatically lower A/R beyond 120 days, often as low as 4% and even 2%.
In this case, the difference in remittance between the two approaches amounts to $463,020 or 9.
08% more to the bottom line.
Note that billing quality is a key component of the billing cost computation and the decision to outsource the billing service is based on a multi-fold improvement in billing quality.
Such an improvement must be so great that only a specialist-billing provider can create and maintain the required volumes and economies of scale.
Therefore, one should consider outsourcing only after due diligence establishing that the billing provider delivers superior performance, the difference in performance is quantifiable and significant enough for a bottom-line growth, and such performance can be verified independently and continuously.
A rule of thumb is that the new combined percentage of fees and uncollected revenue must stay below in-house A/R (billing quality measured in terms of % of billed amount in A/R beyond 120 days).
Additional Benefits of Quantitative Approach to Billing Outsourcing Note also that by outsourcing to the right billing service provider, the practice liberates itself from multiple additional issues associated with process, personnel, and technology aspects of billing.
Specifically, the only remaining billing function for the practice owners is the periodic review of cash flow and accounts receivables, in other words, an entirely bottom-line driven supervision.
There is no need to micromanage the submission process, reconcile rejections, appeal to the payers, etc.
Similarly, there is no more need to manage billing employee team, their vacations, sick days, benefits, teamwork, and turnover.
Finally, there is no more need to deal with any technology issues, such as installation, maintenance, backups, disaster recovery, HIPAA compliance, and upgrades.
References:
However, excess focus on reducing costs of individual process components while ignoring total billing quality exposes medical practice to significant financial downside.
Quantification of billing quality and its inclusioninto price-performance equation of billing service yields more comprehensive financial picture and better decisions about billing service selection and its management.
Such an approach also results in substantially higher remittance and better regulatory compliance.
It is effective, however, only subject to billing performance guarantees and transparency.
Traditional sequence of management steps to rationalize medical practice billing and reduce its costs requires the physician to invest in processes, personnel, and technology:
- Study your denials to eliminate errors by using claims-scrubbing software
- Educate your front-end employees about the billing process and know how to be a part of it
- Investigate tools for electronic submission and take advantage of technology
- Set guidelines for which claims and which dollar amounts merit appeals
- Provide patients with clear payment policies up-front
Assuming three FTE's working the billing and using Vericle's technology, the costs would be about $120,000 for personnel and $36,000 for technology.
For reference, Vericle technology performs comprehensive claim validation, patient demographics and eligibility test prior to visit, electronic claim submission, and comprehensive reporting for followup etc.
Additionally, using Vericle technology, 98% of claims are now clean, adding further value for the investment in claims processing technology.
In this case, billing costs add up to $156,000 annually.
This is a significant accomplishment in terms of billing processing costs, because without advanced technology, the same practice may need at least seven FTE's, at cost of $280,000.
Accordingly, the previous arrangement prior to installing the Vericle technology costs at least $292,000 (assuming 1/3 of cost for an alternative albeit inferior billing package).
Thus, an investment of $36,000 in superior technology saved at least $136,000, which is obviously an impressive ROI on $36,000.
However, this approach does not account for the entire spectrum of costs associated with in-house billing approach.
It ignores the total revenue aspect of the billing function, which is its ultimate purpose.
Quantification of Losses Caused By Insufficient Billing Process Quality To receive a more comprehensive perspective, let us compute the total losses of this approach generated by uncollected payments.
We will proceed by establishing a convenient baseline and figuring out a way to approximate the losses.
In our experience, the likelihood of payment shrinks dramatically with time.
With few exceptions, the unpaid claims for more than four months are eventually forfeited.
Hence the importance of A/R beyond 120 days.
Therefore, to compute the total losses we must start with computing the total revenue and then use the days in accounts receivable as a proxy for the underpayment.
For the case study in hand, we estimate the total practice revenue by assuming average physician revenue of $300,000, which, for 17 physicians, adds up to a total of $5,100,000.
Next, since the stated percent of clean claims for electronic submission is about average (98%), we will also assume an average nation-wide A/R beyond 120 days, which currently stands at about 17.
7% (Lowes, 2004).
This number indicates that the amount of losses on the billings of $5,100,000 approaches $902,700.
Even if 40% of that A/R were eventually collected, we would still face a revenue loss of $541,620 .
Therefore, while the practice saved $136,000 on personnel, it still lost an estimated $541,620 on billing quality despite the newly installed technology.
The lesson of this illustration is that the costs of billing function may be grossly underestimated because of the following common pitfalls: Pitfall #1: Focus on costs of individual components of the billing function instead of computing the bottom line cost to the practice.
Pitfall #2: Underestimate the costs of these components such as benefits, sickness, management, replacement, education, and vacations in case of personnel costs.
Pitfall #3: Focus on the numbers or quality of claims instead of billed and paid numbers of dollars.
An alternative, bottom-line oriented approach, guarantees improved revenue before spending a dime:
- Measure your current percentage of A/R beyond 120 days and assume (for the sake of conservative management) that money is lost.
- Find a billing service provider with significantly higher performance levels than your own solution
- Base your management decisions on total cost/performance metrics.
This approach aligns the interests of the biller and of the physician and results in dramatically lower A/R beyond 120 days, often as low as 4% and even 2%.
In this case, the difference in remittance between the two approaches amounts to $463,020 or 9.
08% more to the bottom line.
Note that billing quality is a key component of the billing cost computation and the decision to outsource the billing service is based on a multi-fold improvement in billing quality.
Such an improvement must be so great that only a specialist-billing provider can create and maintain the required volumes and economies of scale.
Therefore, one should consider outsourcing only after due diligence establishing that the billing provider delivers superior performance, the difference in performance is quantifiable and significant enough for a bottom-line growth, and such performance can be verified independently and continuously.
A rule of thumb is that the new combined percentage of fees and uncollected revenue must stay below in-house A/R (billing quality measured in terms of % of billed amount in A/R beyond 120 days).
Additional Benefits of Quantitative Approach to Billing Outsourcing Note also that by outsourcing to the right billing service provider, the practice liberates itself from multiple additional issues associated with process, personnel, and technology aspects of billing.
Specifically, the only remaining billing function for the practice owners is the periodic review of cash flow and accounts receivables, in other words, an entirely bottom-line driven supervision.
There is no need to micromanage the submission process, reconcile rejections, appeal to the payers, etc.
Similarly, there is no more need to manage billing employee team, their vacations, sick days, benefits, teamwork, and turnover.
Finally, there is no more need to deal with any technology issues, such as installation, maintenance, backups, disaster recovery, HIPAA compliance, and upgrades.
References:
- S.
Donato, "Three Steps to Fewer Denials.
Getting Claims Management Under Control", Physicians Practice, April 2003. - R.
Lowes, "Practice Pointers: How to Cut A/R", Medical Economics, September 3, 2004.
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