Deductions to Collections: Strategies for Effective Accounts Receivable Management

The United States has the highest healthcare administrative costs per capita compared to OECD countries, according to Organization for Economic Co-Operation and Development. Accounts Receivable Management (ARM) in healthcare isn’t just about ensuring the bills get paid; it’s the backbone that holds the financial wellbeing of an organization together. It's critical to get it right since this is the point where the hard work meets revenue. In this article we will understand the effective management of accounts receivable.

The Current Landscape: Trends and Challenges

The world of healthcare finance is always changing and to stay ahead of the game you need to know what the current trends are and overcome the obstacles. According to the American Hospital Association (AHA), in 2021 US healthcare spending was $4.3 trillion and hospitals in the US faced over $42 billion in uncompensated care costs, up from previous years’ which on average accounts for approximately 10% of a hospital’s revenue. The American Medical Association (AMA) says administrative complexity in billing and collections accounts for $266 billion in excess costs annually in the US healthcare system. Hospitals and health systems are facing increasing administrative burden and costs due to certain commercial health insurer practices like prior authorization and denials. In 2023, hospital costs increased twice as quickly as health insurance rates. To navigate such chaotic waters, healthcare organizations are turning to technology and strategic partnerships.

Strategies for Effective Accounts Receivable Management

1. Streamline Your Processes with Technology

   In the age of automation, leveraging technology is becoming increasingly essential. Here’s how technology can revolutionize your ARM:

   • Automated Billing Systems:

     As we are aware, automation reduces human error and speeds up the billing process. According to the Healthcare Financial Management Association (HFMA), automated systems can cut billing costs and reduce compliance risks by up to 30%. A report by McKinsey and Company suggests that resorting to automation and analytics could eliminate $200 billion to $360 billion of spending in US healthcare. The same report also suggests that with automated billing systems, call centers have already increased their productivity by 15% to 30%.

   • Predictive Analytics:

     Utilizing predictive analytics helps understand payment trends beforehand and recognize potential issues before they magnify into problems. This proactive approach can significantly reduce the aging of accounts receivable.

2. Improve Denial Management

   Denial management is like gardening; as soon as you pull out one weed, another one soon appears. But effective denial management strategies can make a significant difference.

   • Root Cause Analysis:

     Resolving the underlying causes of denials can stop them from recurring. The American Medical Association has put emphasis on how crucial it is to do continuous monitoring and analysis to minimize the rate of denials.

   • Timely Appeals:

     Appealing promptly helps in increasing the probability of successful reimbursement. According to Black Book Research, healthcare providers who appeal within the first 30 days of having their claims denied are 50% more likely to succeed in getting their money back.

3. Enhance Patient Financial Communication

   Clear communication with patients about their financial responsibilities is crucial. The Federation of American Hospitals (FAH) reports that patient education on billing can reduce unpaid bills by 20%.

   • Transparent Billing Practices:

     Providing clear, itemized bills helps patients understand their charges and reduces confusion. A 2023 survey by InstaMed revealed that 70% of patients will pay their bills on time if they receive clear and detailed billing statements. The ‘PATIENT FRIENDLY BILLING’ project by HFMA and MGMA is a good example of an initiative to implement clear and concise bills.

   • Payment Plans:

     Giving flexible payment plans can improve collections by making it easier for patients to pay their bills. HFMA found that 45% of patients are more likely to pay their medical bills if given the option of a payment plan. 66% of providers are prioritizing the increase of online, automated and self-service payments.

4. Strengthen Internal Controls and Training

   Staffing struggles are among the top challenges that providers and payers reported. Approximately 71% providers were challenged by staffing shortages. Ensuring that your staff is well-trained and that internal controls are robust can have the most significant impact on the effectiveness of ARM.

   • Regular Training Programs:

     This would mean constant up-gradation of knowledge and skills of the billing staff regarding the latest coding updates, new billing practices, and compliance. HFMA also opines that regular training will reduce errors and increase the accuracy of the bills.

   • Internal Audits:

     Conducting regular internal audits enables one to pinpoint areas for improvement and ensures compliance with best practices. This is a preventive step that avoids potential problems before they even impact the revenue cycle.

5. Monitor Key Performance Indicators (KPIs)

   Tracking and analyzing KPIs is important to measure the effectiveness of your ARM strategies and making data-driven decisions.

   • Days in Accounts Receivable (DAR):

     This KPI shows the average number of days it takes to collect payments. A lower DAR represents a very lean and mean ARM process. According to one HFMA report, this benchmark is normally in the 30–40-day range for the industry. Every day less in DAR is an improvement that can make a meaningful difference in cash flow. A hospital having $100 million in annual net patient revenue could improve cash flow by almost $275,000 for every single day reduction in DAR.

   • Net Collection Rate:

     This is the percentage of collections against total billing. A higher rate thus indicates better performance in revenue collection. The HFMA states that a net collection rate between 97% and 100% is considered a strong rate. For example, shifting the NCR from 95% to 98% on $100 million of net patient revenue is $3 million more in collected revenue each year.

   • Denial Rate:

     Monitoring the percentage of denied claims enables identification of trends and areas for improvement. According to MGMA, the average denial rate of healthcare organizations surveyed is 5% to 10%, but top-performing organizations aim for less than 4%. For instance, a healthcare provider has reduced the denial rate from 10% down to 5% on $50 million of claims. By this change, possibly they could now be able to collect an extra $2.5 million in revenue.

   • Bad Debt:

     Bad debt impacts revenue cycle performance, and more than 50% of providers report that at least 10% of their patient accounts have some type of bad debt. Providers may find opportunities for process improvement, such as capturing more revenue up-front for example, simply by tracking bad debt. According to AMA, providers should strive to maintain a bad debt percentage under 5%.

Conclusion: From Deductions to Collections

Effective management of the account receivables is about the financial well-being of healthcare organizations. Healthcare providers can revolutionize their revenue cycle by applying technology, strengthening denial management, improving patients' financial communications, enhancing internal control processes, and monitoring KPIs.

As one famous RCM expert once said, "Managing accounts receivable is much like tending your garden: with the proper tool and specific knowledge, aligned by a little bit of teamwork, you are able to grow a sound field of finances." So let us embrace these strategies and be prepared to watch our financial health flourish. It is only through strategic planning and innovative technologies that healthcare providers will be better equipped to handle their Accounts Receivables for a finer, more profitable revenue cycle. Here's to turning deductions into collections and mastering the art of ARM!