Leverage Patient Bad Debt to Increase Revenue and Yield
In our increasingly data-driven healthcare environment, effective financial management requires timely analysis of Key Performance Indicators (KPI). But it’s essential to track the metrics that give you the most complete picture of your revenue cycle.
Traditionally, healthcare finance executives looked at “days in A/R” and “aged receivables” to evaluate revenue cycle performance. While important, these KPIs are just snapshots in time and don’t provide the big picture needed to fully understand how your revenue cycle processes are impacting the overall financial performance of your organization.
In his HFM Blog post in October 2016, Navigant’s Kent Ritter wrote ‘in the age of tightening payment, hospital and health system revenue cycles are facing unprecedented pressure to enhance their yield while reducing costs and maintaining high levels of care quality and patient satisfaction.’
Ritter suggests that ‘yield (i.e., cash collected/expected net revenue) is not just a financial metric; it also should be at the top of a revenue cycle key performance indicator list.’
Ritter identified three key areas for which effective coordination would have a positive impact on yield. Of these three key areas, only one – Bad debt from patients with insurance – can be leveraged for a nearly immediate increase in yield. And, it can help increase yield even more by enabling or accelerating other top revenue cycle projects.
Everyone would agree that prevention is the ideal solution to patient bad debt. Clearly, it’s best to collect payments from patients early in the revenue cycle. Most healthcare providers are working hard to make it easier for patients to pay their share sooner.
But these efforts take time, expertise and money to achieve the goal of avoiding bad debt. Meanwhile, patient accounts continue to age beyond 120 days — and patient account yield continues to shrink.
Our blog post Trends in Medical Bad Debt Expense thoroughly describes this dilemma.
There are four proven approaches to handling patient bad debt accounts. When done well by reputable firms all of these approaches comply with legal and regulatory standards. They all also keep your patients’ satisfaction at the forefront of every interaction. However, each approach has unique financial and operational factors that must be considered in the context of your specific situation.
- Primary Placement – Placing patient bad debt accounts with one or more contingency collection firm(s) at about day 120 is the most common approach used by hospitals and healthcare systems. Subsequent bad debt accounts are continually placed on a recurring basis (daily, weekly, monthly, etc.). Payments to hospitals trickle-in as contingency agencies collect money from guarantors and subtract their contingency fee. Primary placement is the easiest approach for hospitals to manage because accounts are placed once and left with the primary agency indefinitely. Returns and yield are the lowest because contingency agencies make their money by working new accounts; 80% of collections occur in the first 60 days after placement. Hospitals are reliable suppliers of new accounts, so older accounts go untouched as new ones continually arrive. Consequently, yield continuously shrinks as older accounts languish in the ever-growing stockpile of unpaid accounts.
- Secondary Placement – Recalling inactive bad debt accounts from a primary contingency agency at a pre-determined time and subsequently placing them with another agency is a less common approach than doing primary placement only. Placing accounts with a second contingency agency usually boosts collections and increases yield because the accounts are “new” to the second agency. Like primary placements, 80% of secondary collections occur in the first 60 days after placement. Yield subsequently shrinks as accounts languish in the second agency’s growing inventory of unpaid accounts. Because payments are contingent, hospitals run the risk that revenue gained from a second placement could be less than their costs to recall and re-place accounts with secondary agencies.
- Asset Sale – Selling inactive patient accounts is less common than placing accounts with contingency collection firms. Before selling their accounts hospitals should allow ample time for settlement of all third party claims, for guarantors to apply for financial assistance, and for contingency collections to ebb. Asset sales offer the highest return and largest yield increase on late-stage accounts. Net-present-value is greatest as well because payment is made up-front unlike contingency payments which trickle-in over an extended time. A valuation of the portfolio of accounts determines its fair-market price. Hospitals would initially sell their existing “warehouse” of accounts followed by recurring “forward flow” sales of subsequent accounts. Patient account sales often require detailed scrutiny and more approvals (e.g. bond covenants might prohibit or limit the sale of hospital assets including bad debt accounts).
- Pre-Paid Lease – This approach pays hospitals up-front for the exclusive right to work their patient accounts for a pre-determined period of time. Because it’s newer, it’s less common than the other three approaches. A pre-paid lease offers a higher return, a larger yield increase, and greater net-present-value than secondary placement. A valuation determines the fair-market price of the lease. Hospitals initially lease their existing “warehouse” of accounts followed by recurring “forward flow” leases of subsequent accounts. Because hospitals own the accounts, bond restrictions wouldn’t apply.
Most hospitals and healthcare systems have written-off some patient accounts to bad debt during the past five years. Many have experienced an increase in write-offs in recent years. All hospitals and healthcare systems are working hard to prevent patient bad debt at the front-end of their revenue cycle.
Since bad debt exists and will probably grow before its prevention can be achieved, why not look into new approaches to managing your late-stage patient accounts? Doing so could quickly increase your patient account yield and generate cash to invest in preventing bad debt in the future.
Let’s spend 15-minutes on the phone to see if we can help you objectively assess your patient bad debt process and how to attain the best return on these overlooked assets. Just email Tim Wilson, Business Development Manager, or call Tim at 443-371-7894 to schedule a phone call.