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Chapter 11

Managing Revenue Cycle

Learning Objectives

Define and understand the importance of the revenue cycle.
Explain the important elements of the revenue cycle.
Identify methods of financing accounts receivable.
Describe the laws governing accounts receivable.
Discuss the ratios used to evaluate revenue cycle performance.

Introduction

Three factors set the healthcare industry apart from most other industries with regard to accounts receivable:

The nature of the services provided
The cost of the services provided
The method of payment for the services provided

Distinguish Revenue Cycle from Accounts Receivable

Accounts receivable (AR)—money due to the organization from patients and third parties for services that the organization has already provided

Revenue cycle—multidisciplined approach to reducing the amount in accounts receivable by effectively managing the production and payment cycles

Accounts Receivable Cycle

Cycle	Patient Activity	AR Activity
Production cycle	Patient seeks care
Pre-care	Obtain demographic data Obtain insurance data Verify insurance coverage Obtain authorizations Obtain deductibles Obtain copays
Care	Record changes Maintain medical record Review utilization
Care completed	Transfer medical record Analyze medical record Abstract medical record Code medical record Transcribe dictation
Payment cycle	Print bill Submit bill Follow up bill Collect bill, or bill resolution

Distinguish Revenue Cycle from Accounts Receivable

For pre-care:

The Healthcare Financial Management Association (HFMA) says that inadequate or incorrect information gathered at this stage is the single greatest reason for not billing or collecting accounts receivable in a timely manner.

Patient Information Collected During Pre-care

Name, address, and phone number of attending physician
Preliminary diagnosis
Date of most recent previous outpatient services or admissions
Accident information
Financial resources information for self-pay patients
Authorizations and precertifications
Consent for medical treatment
Assignments of insurance benefits from the patient to provider

Patient name and other identifiers
Patient address and phone number
Patient occupation, employer address, phone number
Resident status of all foreign-born patients
Name, address, and phone numbers for the next of kin
Name, address, telephone for person responsible for bill
Name, address, phone numbers of third-party payers
Name, address, and telephone number of primary care physician

Distinguish Revenue Cycle from Accounts Receivable

For the bill print phase in the payment cycle:

Any previously agreed upon discounts applied at this time
Changes the figure from a gross receivable to a net receivable

Importance of Accounts Receivable

AR performance varies significantly between organizations. This can be due to:

The board’s credit and collection policies
Management methods to reduce AR

Importance of Accounts Receivable

Carrying costs—costs associated with extending credit to the patient after services have been provided

Routine credit and collection costs—billing and collection costs incurred during the average payment cycle

Delinquency costs—costs incurred due to the patient/third party not paying on time during the average payment cycle

Management of the Revenue Cycle

Extension of credit is seen as a necessary evil because of:
The nature and cost of services provided
Third-party payment

Should be seen as an exception to the rule, and not the rule itself

Management of the Revenue Cycle

The objective of revenue cycle management is to reduce the collection period, or the number of days between the time of services and the time of payment.

Management of the Revenue Cycle

Management of the revenue cycle includes four steps:

Policies and procedures
Accounting system
Medical record system
Credit-and-collection policy

Management of the Revenue Cycle

Steps in managing the revenue cycle

Policies and procedures for registering/admitting all patients
Accounting systems that provide prompt and accurate recording of charges
Medical records systems that allow for prompt and accurate recording of clinical information
A board-approved credit-and-collection policy that directs the organization’s management regarding extending credit and collecting accounts

Accounting System

Internal auditors—often play a role in determining effectiveness of the accounting system by verifying the systems internal control

Internal control—consists of accounting systems and supporting procedures that provide systematic, automatic safeguards to protect the integrity of the accounting information

Accounting System

Effective accounting systems also:

Identify and record all valid accounting transactions on a timely basis
Value these transactions in an appropriate manner
Identify the time period in which these transactions occur
Disclose these transactions in the financial statements

Internal Audit of Account Receivable Questions, Exhibit 11.3

Do registration/admission procedures exist and ensure that complete and accurate accounts receivable and collection information is gathered, including such documents as signed authorization forms, patient billing information, and insurance assignments?

Do procedures exist and ensure that services rendered to patients are medially necessary?

Is a complete medical record prepared, including physician discharge summaries and physician statements attesting to the principal diagnosis and other clinical information?

Do procedures exist and ensure that amounts due from third-party payers are properly supported?

Do procedures exist and ensure that cash receipts are properly recorded?

Internal Audit of Account Receivable Questions, Exhibit 11.3

Do procedures exist and ensure that charity care balances are identified and deducted from gross revenues?

Do procedures exist and ensure that detailed accounts receivable records are routinely compared to general ledger control accounts and third-party payer logs?

Do reviews exist and ensure that allowances for bad debts and contractuals are adjusted periodically to ensure that receivables are reported at estimated net realizable amounts?

Do procedures exist and ensure that medical records personnel are properly trained and supervised to provide appropriate coding?

Do procedures exist and ensure prompt coding of Medicare and other similar medical records data?

Do procedures exist and ensure independent coding reviews, primarily for Medicare patients?

Medical Records

From an AR point of view, emphasis has changed from medical record promptness to accuracy.

Increase in DRGs as hospital main form of payment

Signed physician attestation not required before submission

Emersion of electronic medical records (EMR)

Patient Billing System / Medical Record System Interface, Exhibit 11.4

Preadmission

Patient Billing System Medical Record System

Demographic data Demographic data

Statistical data Clinical data

Financial data

Grouper

Admission

Clinical data editor

Charges Preliminary DRG

Discharge More clinical data

Medical record complete

Grouper

Final DRG assignment Clinical data editor

Bill

DRG database

Medical Records

According to the American Health Information Management Association (AHIMA), the key elements of a coding compliance plan include:

A commitment from the organization to correctly report and assign codes

Sources of coding guidance

Positions with delegated authority to assign codes

Procedures to follow when assigned codes are not clear

Areas of risk that have been identified by compliance audits

Procedures to resolve coding disputes

Developing and revising coding policies

From Accounts Receivable Management to
Revenue Cycle Management

Revenue cycle management conceptualizes the accounts receivable process as a continuum rather than as a set of isolated events and incorporates the use of multidisciplinary teams, including clinicians, to improve performance.

From Accounts Receivable Management to
Revenue Cycle Management

Benchmarks include:

Outstanding revenues that exceed the industry average of about 50 days
More than 15% of receivable exceeding 90 days
High management turnover in revenue-related areas
Evidence of cash-flow problems
Declining net-to-gross ratios

Case Study

Suppose that you were hired as charge analyst a few months ago at Bryant Hospital. Due to lack of proper training, you have steadily fallen behind in billing for hospital services to patients; patients are now complaining about receiving late bills even after they have made payments. The hospital is suffering from both a collections standpoint and a public relations standpoint due to late billings, and the hospital is now facing an internal audit.

What problems will the internal audit discover?
How will the hospital address these problems?
What can the hospital do to process the bill in a timely manner?
Are you the sole reason for the late billing? Who else can or should be held accountable?
Are the patients still responsible for the late billing?
What if they refuse to pay because the hospital was not upfront about the costs?

From Accounts Receivable Management to Revenue Cycle Management

Opportunities for improvement found in five key areas:

Denials management
Cash acceleration or follow-up on unpaid claims
Patient payments of copays and deductibles at point of service and enhanced methods of patient payments
Third-party payment compliance to ensure that payment received was the correct amount
Vendor contract coordination to ensure a broad-based evaluation of contract term in relation to coordination of benefits

Financing Accounts Receivable

HCOs sometimes convert their outstanding AR into cash in order to meet short-term cash demands.

Two methods of doing this:
Factoring—the process of selling receivables to a bank or collecting agency to collect
Pledging receivables—the process of using receivables as a collateral to obtain a loan

Federal Laws Governing AR

The Fair Debt Collection Practices Act applies only to third party bill collectors.

Federal Laws Governing AR

It addresses four key billing practices:

Skiptracing—governs how the debt collector communicates with consumers owing the debt and under what conditions a debt collector can communicate with others regarding debt
Collector communication—governs when debt collectors can communicate with consumers
Harassment—identifies certain behaviors and actions by debt collectors that may be considered harassment and are prohibited
Deceptive or false representations—prohibits misleading representation designed to intimidate the consumer

Federal Laws Governing AR

Truth in Lending Act establishes disclosure rules for consumer credit sales.

Federal Laws Governing AR

If eligible, the lending organization must disclose the following under Regulation Z:

Annual percentage rate
Amount of the finance charge
Amount of the principal
Number of payments
Total of all payments
Late charge arrangements
Prepayment arrangements
An opportunity for the debtor to receive an itemization of how the payments are to be applied

Federal Laws Governing AR

Fair Credit Reporting Act governs the permissible use of credit reports.

Addresses ways in which credit reports can be obtained:
Court order
Permission of the consumer
Legitimate business need

Federal Laws Governing AR

Information that must be removed from credit reports and the time at which it must be removed:

Bankruptcies after 10 years
Judgments after 7 years or when the statute of limitation expires, whichever is longer
Paid tax liens after 7 years
Collection accounts or those charged to profit and loss after 7 years
Arrests, indictments, or convictions after 7 years
Other adverse items after 7 years

Evaluating AR Performance

Collection period = average amount of time an organization takes to collect a bill

Net AR
(Net patient services revenue/365)

Key Points

Accounts receivable is defined as money due to the organization by patients and third parties for services already provided.
Revenue cycle is defined as a multidisciplinary effort to reduce the amount in accounts receivable by managing both the production cycle and payment cycle.
The objective of managing the revenue cycle is to reduce the collection period by reducing the amount of receivables.
The four steps of managing the revenue cycle include having policies and procedures regarding admission/discharge, having an accounting system that records charges promptly and accurately, having a prompt and accurate medical records system, and having a credit-and-collection policy.

Key Points

Revenue cycle management views the accounts receivable process as a continuum.
The Fair Debt Collection Practices Act, the Truth in Lending Act, and the Fair Credit Reporting Act are three federal laws that govern accounts receivable.
The best way to evaluate the management of the revenue cycle is the average collection period ratio.

Discussion Questions

What is the definition of accounts receivable? What are some primary reasons patients are sometimes not billed in a timely manner?

How does accounts receivable differ from the revenue cycle?

What happens when an organization extends credit to patients?

What are the steps in managing accounts receivable? Explain each step.

What are the methods used to collect accounts receivable?

How can an organization improve its revenue cycle management?

Discussion Questions

What are the advantages and disadvantages of the two methods used to convert accounts receivable to cash?

What are the key provisions of the four laws that govern accounts receivable?

What is the best way to evaluate revenue cycle management performance?