measuring the true return of your hospital's revenue cycle

Calculating the yield of revenue cycle initiatives can help hospitals better determine the value of these initiatives-and where to focus hospital resources.

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Publication: Healthcare Financial Management
Author: Nieman, Jeffrey M
Date published: September 1, 2010

As hospital executives face turbulent economic conditions, a high-performing, sustainable revenue cycle is a critical factor in their organizations' survival. Achieving sustained performance requires investment in people, innovation, and process improvement as well as a commitment to comprehensive, strategic financial measurement.

Rut what are the performance indicators that healthcare leaders should use to understand the return on their revenue cycle management initiatives? Moreover, how can these metrics inform mission- critical decisions, provide business intelligence, and enable peer-market comparison?

Often, CFOs provide CEOs and board members with specific financial performance metrics related to revenue cycle performance, such as key performance indicators (KPIs) commonly used by hospitals to compare their revenue cycle performance with that of their peers. Rut these snapshot measurements can fail to fully and accurately reflect a hospital's fiscal health and may be measured inconsistently within a system, creating a data-rich but information-poor decision loop. For example, the use of KPIs alone, such as accounts receivable (A/R) days, aged receivables, and cash as a percentage of net revenue, is unlikely to provide insight into a hospital's service line profitability, its degree of physician alignment, or the impact of the revenue cycle on the patient experience.

However, by using KPIs to calculate the annual rate of return- or yield- of revenue cycle initiatives, hospital executives can accurately determine how much value the revenue cycle contributes to a hospital's bottom line and hone their team's focus on efforts that support the hospital's mission.

The Case for Yield

Yield is defined as patient cash collections minus the cost to collect, divided by expected reimbursement-with all data values measured within a consistent timeframe. The formula is as follows:

Cash - Cost -t- Expected Reimbursement = Yield

Patient cash collections should include all collections received through patient accounting, excluding costs settlement payments, disproportionate share hospital payments, or payments made at the top general ledger level. The cost to collect value should be derived from consistent cost methodology within a system and timeframe. Collection costs could include software licensing, vendor contracts, patient access and HIM expenses, IT support, and other operational expenses. Expected reimbursement is defined as expected payment for services provided, including payment from contracted, third-party insurers and patients, as identified through patient accounting and adjudication systems.

Why is measuring yield so important? Just as the use of earnings before interest and tax (EBIT) blunts the influence of differing financing and tax structures and provides a comparative sightline for profitability and efficiency evaluation, equating yield normalizes healthcare revenue cycle performance reporting. Although healthcare KPIs such as A/R days, aged receivables, and cash as a percentage of net revenue are appropriate metrics for understanding short-term, point-in-time performance, these KPIs are notyet standardized across the industry and may not be used by some hospitals to measure revenue cycle performance. As a result, reporting of revenue cycle performance outcomes can vary widely depending on the factors used in the calculations- resulting in an incomplete picture of the revenue cycle's true return and an inability to determine proactive course corrections on strategic revenue cycle management initiatives.

Industrywide adoption of yield measurement methodology can better enable peer-to-peer comparison and create the framework for structured evaluation of revenue cycle management among hospitals within a health system- regardless of profit -status requirements to publicly disclose EBIT.

A Case Study in Maximizing Yield

At one of the nation's largest enterprise health systems, the results of extensive, multiyear healthcare revenue cycle performance benchmarking and analysis determined that yield is the appropriate measurement of the organization's revenue cycle success.

The health system's commitment to improving revenue cycle performance began with a commitment to standardized and integrated processes, automated workflows and systems, and an experienced revenue cycle staff. These factors helped the health system achieve staffing with experienced revenue cycle experts, a health system can achieve significant increases in cash within a short amount of time- driving EBIT value and optimizing yield. As the hospital's revenue cycle performance continues to improve through enhancements in processes, continual innovation, and revenue cycle expertise, the health system will experience a steady rate of improvement- narrowing the gap between net patient revenue and expected reimbursement.

As the health system continues to measure and benchmark trends in its KPIs, it can accurately and predictably close the gap between expected reimbursement and cash collections, helping to stabilize, and sustain the revenue cycle- thus, optimizing yield. With ongoing focus and investment in revenue cycle performance maturity, the health system will continue to see incremental and year-to-year increases in net revenue and EBIT- uncovering cash for reinvestment in programs that support the health system's mission.

Depending on a health system's current revenue cycle performance maturity and its appetite for revenue cycle operational improvements, it can be possible to significantly increase yield at the onset of revenue cycle performance improvement initiatives and successfully stabilize the rate of return year after year.

Practical Applications: Initiatives to Optimize Yield

Through improvement initiatives that directly target the functions and staff associated with revenue cycle management, a hospital can optimize yield in the short term and experience long-term, sustainable revenue cycle performance. Where should a hospital focus limited resources to experience ROI? Based on the evaluation of revenue cycle performance maturity models of more than 75 demographically diverse hospitals and the implementation of best practices at one of the nation's largest health systems, the following are targeted areas that can predictably optimize yield.

Adopt patient-centric operations. Hospitals should successfully provide patients with the best possible clinical care presented alongside outstanding customer service- beginning at preregistration and continuing through final collection for services. Yet many hospitals fail to adequately invest in the patient experience in nonclinical settings or measure the impact of revenue cycle impressions on patient and physician satisfaction. To improve patient -related business operations, hospitals should adopt a patient- centric financial approach modeled on integrated care delivery: Provide the right communication at the right time with the right resources. Hospitals can apply this approach and optimize yield through improvements to preregistration and financial clearance, patient access, and eligibility verification.

Centralize financial clearance functions. Establishing a centralized financial clearance team to manage all workflows related to scheduled patient services focuses specific, experienced staff on working directly with the admitting physician office, payer(s) , and patients. This ensures full financial clearance prior to the provision of care, from patient liability notification to eligibility verification and clinical clearance. These efforts can improve cash collections through consistent, accurate demographic data collection and insurance verification procedures, resulting in increased point- of -service cash collections, decreased denials, and reduced bad debt write-off.

Use point-of-service collection training and incentive programs. Significant improvements in point- of - service (POS) cash collections are achievable through onsite and online training programs for hospital registrars and financial counselors. Creating a script-based, scenario-driven training program empowers hospital staff to ask the right questions at the right time to improve up -front patient payment and preserve patient satisfaction. Parallel to the training initiative, an incentive program that considers both individual and team performance goals, while providing monthly financial incentives for staff based on balanced scorecard results, should be introduced. These efforts can help a hospital generate increased cash at the point of service for minimal operational costs.

Case in point: Although an initiative such as this will incrementally increase the cost to collect, it also could drive more aggregate cash out of what historically would have been bad debt. Today, approximately 37 percent of total patient cash collected for the health system described earlier in this article is collected at the point of service.

Implement patient self-service technologies, such as registration kiosks and web portals. Common in other industries, self-service technologies are nearing a tipping point in health care as more patients expect convenience and accessibility from healthcare providers. To meet this demand while improving revenue cycle performance, hospitals can use a web portal to enable patients to electronically self-service their account through online registration, information validation, and payment.

The primary benefit of a web portal initiative is the ability to reduce the workload for centralized financial clearance and post-service early-out departments, which also results in a reduction in operational costs. Similar to the experience of banking at an ATM machine, self-service kiosks in the hospital patient registration area enable a patient to check in, electronically sign necessary documentation on the kiosk, and prepare for the visit, all with limited or no assistance from patient access staff. Implementation of the kiosks drives supply savings through a significant reduction of paper usage- resulting in an approximate 80 percent reduction in paper costs for the health system discussed earlier in the article while supporting the organization's environmental initiatives. In addition, the kiosk system streamlined the health system's registration process and reduced the average check-in time to three minutes or less.

For the large health system cited, these three initiatives had a combined ROI of 350 percent and a typical yield improvement of 0.5 percent within one year.

Improving Clinical Quality in the Revenue Cycle

Hospital resource constraints can make it difficult for experienced revenue cycle clinicians to be readily available to the business office staff to support preservice clinical authorizations and manage retrospective clinical denials. An increase in "no-authorizations" and denied claims, coupled with possible coding discrepancies in the chargemaster, creates a negative impact on cash collections. To address this challenge, hospitals should focus on two main areas for improvement.

* Centralized clinical clearance and appeals management

* Standardized chargemaster

Establishing a team of nurses fully dedicated to the business office for preservice clinical clearance and the writing and management of clinical appeals will enhance the efficiency of account management and dramatically improve cash collections. Although this initiative can require an investment in skilled resources, the approach can result in significant value in aggregate cash collection on claims previously deniednearly $80 million in cash for the multihospital system described earlier. To improve chargemaster accuracy, employee efficiency, and cash collections, hospitals can focus on the recategorization of miscellaneous charge codes, standardization of surgical services codes, establishment of codes where none existed, and the addition of new services to the chargemaster. These two initiatives had a combined ROI of 2,220 percent and a typical yield improvement of 0.5 percent within one year for the healthcare system studied.

Rethink Business Office Management

To significantly improve revenue cycle performance maturity, hospitals should transition A/R management functions- including billing and follow-up activities as well as self-pay and baddebt collections- from their individual hospital business offices to a centralized hospital business office delivery approach. This service delivery approach can achieve economies of scale, enabling the implementation of the following improvement initiatives.

Establish industry best practices. To establish a refined, payer- centric business office process, hospitals should focus on industry best practices for payer standardization and clean claims, including managed care and government followup standards. Standards should include categorizing billing work efforts based on either paper or electronic billing to increase billing efficiencies; developing automated workflows for payer claim status to reduce manual interaction with payers; creating a dynamic, payer-based followup cycle for denials and disputes; and standardizing adjustments for all central business offices.

Automate A/R workflow. Hospitals should include A/R automation in their revenue cycle maturity investment strategy and partner with their software and outsourcing providers who can introduce additional workflow efficiencies. For example, automated workflows can be built to respond to predetermined account thresholds for account adjudication. Working with the multihospital system cited earlier, one organization developed and implemented more than 3oo,ooo automated workflow decisions into a proprietary revenue cycle management engine to integrate with any primary vendor system currently used by the health system for A/R management. These Six Sigma-based workflows perform actions previously completed by collection staff, allowing for both increased speed of adjudication and reduced operating costs.

Implement innovative strategies from outside health care. Customer financial profiles- demographic data, credit rating, and income- have long been an integral component of service transactions in other industries. However, the length of time between delivery of and payment for healthcare services is closing as more health systems adopt technologies and processes to estimate and communicate liabilities, efficiently categorize debt for adjudication, and predict cash flow (Evans, M., "Cash Is King," Modern Healthcare, Aug. 17, 2009). For example, one automated tool reviews hospital account and insurance data, credit report data, and census bureau data to predict future payment outcomes. The tool reduces manual work efforts and supports the development of automated workflows based on the predicted outcome. For self-pay patients, the tool can predict with 99.9 percent accuracy the 3o percent of the population who will not pay, regardless of the level of work effort invested in the accounts, as well as the 3o percent who will pay with minimal work effort. Use of the tool directs intensive work effort toward the remaining 40 percent of the self-pay population for which there is payment uncertainty and for which the likelihood of increased, focused contact will improve collection results. Such targeted work efforts are designed to optimize both collections and the level of customer service that the patient receives.

For the health system cited in this article, these three initiatives resulted in a yield improvement of 2 percent within one year and were instrumental in stabilizing the health system's revenue cycle for predictive financial performance.

Steps Toward Sustained Revenue Cycle Improvement

Regardless of revenue cycle performance maturity, hospitals can optimize yield by improving operational performance through innovative adoption of revenue cycle technology as well as by enhancing and automating processes throughout the revenue cycle, from patient registration through billing and collections.

Although most initiatives undertaken by the multihospital system described earlier initially resulted in implementation costs, the increase in cash collections, expected reimbursement, and eventual reductions in operational costs led to substantial ROI and optimal yield for the health system. Additionally, the introduction and adoption of a standardized methodology for revenue cycle measurement provided the health system with the means to calculate the return on specific revenue cycle investment efforts, patient experience during revenue cycle impressions, and the effect of such initiatives to the organization's bottom line.

With yield measurement methodology, C-suite revenue cycle discussions can be recast from a review of cost metrics and point-of-service collections to a comprehensive evaluation of the organization's fiscal health and strategic value drivers. The time for this is long overdue in the industry. Will your hospital lead the trend?

Author affiliation:

About the author

Jeffrey M. Nieman

is senior vice president, revenue cycle operations, Conifer Health Solutions, Frisco, Texas, and a member of HFMA's Lone Star Chapter (

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