When it comes to protecting hospital margins, the devil is in the denials. Hospitals require strategies for identifying and responding to denials and underpayments more effectively.


At a Glance

  • Managing low-dollar, high-volume claim denials associated with outpatient procedures is a challenge for many hospitals because of the expense involved in manually reviewing such denials.
  • These denials often are the source of “hidden loss” for hospitals.
  • For some hospitals, the most practical, cost-effective approach for managing low-dollar, high-volume claim denials will include the use of automated systems to monitor and highlight denials and expose trends.  

Across the country, hospitals have established processes for minimizing revenue loss due to payer denials and have invested in revenue cycle systems to curb those losses. But how much revenue is lost every day, virtually unnoticed, in spite of these efforts?

To a large extent, the answer depends on how well the organization’s revenue cycle department is able to address the following questions:

  • What is the organization’s total denials rate (including write-offs)?
  • If the organization were to stratify its charges between inpatient and outpatient care, what would the denials rate and total dollar amount for denials be in each category, and what would be the percentage of denials written off in each category? 
  • What is the rate of and total dollar amount attributed to underpayments (partial denials)?
  • What is the rate of and total dollar amount attributed to contractual adjustments?
  • What are the organization’s top 10 most common reasons for denials, and what are the average amounts and percentages of total denials, underpayments, and contractual adjustments for each reason? 

Some of the answers to these questions may be readily available. But where answers are not readily available, the organization likely faces considerable costs. And the costs may be purposely well-hidden. Why?

Across the country, margins for both providers and payers are being squeezed. What results is a zero-sum game: Every dollar successfully denied as payment to a provider is a dollar added directly to the bottom line of a payer. And even if payers are not overtly trying to sneak inappropriate payment denials past unwary providers, they have little incentive to correct oversights that result in denials, whether those oversights originate with the provider or the payer. This reality puts providers that are not adept in identifying and contesting inappropriate denials at a marked disadvantage.

This industry dynamic means that hospitals with robust denials management processes and systems tend to experience fewer denials, while less-adept hospitals—those that struggle to answer and address the questions above—are subject to increasing denials and erosion of their bottom lines. To avoid unnecessary losses, healthcare finance leaders should continually monitor the suggested metrics above and should watch closely for changes in trends over time. Those hospitals that become adept at contesting their most common denials today likely will not continue to be plagued by those same types of denials in the future. 

Healthcare finance leaders also should establish rigorous review processes for claims and consider the use of a “virtual denials monitor” to facilitate revenue cycle processes and provide proactive alerts. 

Gauging the Magnitude of Hidden Financial Risk

The magnitude of hidden financial risk in any given hospital tends to be based on two simple premises. 

First, most hospitals are already taking steps to challenge denials related to low-volume, high-dollar procedures. Such denials tend to correlate with inpatient procedures, which—being low in volume—should represent a reasonable number of claims to address with a limited number of staff. Moreover, because of the relatively high-dollar amounts involved, the time spent on each denied claim should yield a good payback on a per-claim basis.

Second, hospitals typically cannot justify the expense of manually appealing claims for low-dollar, high-volume claim denials most directly associated with outpatient procedures: The cost is simply too high on a per-claim basis.

If these two premises hold true for a hospital, then the hospital’s hidden financial risks may actually increase. Historically, hospital revenues have been weighted toward inpatient procedures, but changes such as the proposed redefinition of inpatient by the Centers for Medicare & Medicaid Services may cause a shift toward more outpatient billing. And with outpatient billing on the rise, the challenges posed by payer denials of low-dollar, high-volume claims are likely to increase for many hospitals. Simply put, the portion of hospitals’ revenue that is likely growing most rapidly also could be increasingly subject to denials by payers. 

The challenges are real. Consider the case of a multihospital system that has discovered that the No. 1 reason for denials related to outpatient claims is lack of preauthorization for imaging procedures. The issue is identified by the business office, but not until the problem has become a significant one for the hospital. Had the hospital implemented an automated denials tool, it would have been easier for revenue cycle staff to get to the root cause of the denials through trending or proactive identification of the issue. As revenue cycle staff attempt to appeal these denials on the back end, there is little they can do in retrospect because of the preauthorization requirement. Ultimately, the denials written off as a contractual adjustment. 

Underpayments are an additional source of financial risk for hospitals. Identifying underpayments can be difficult for hospitals that lack effective contracts/proration systems designed to help them do so.

Denials typically fall under six categories:

  • Medical necessity
  • Authorization
  • Noncovered service
  • Patient eligibility
  • Timely filing
  • Duplicate claim

To get a rough feel for the financial risk of high-volume, low-dollar outpatient denials, consider the following example.

General Hospital operates in a large metropolitan area with total annual revenues of $500 million, with a split of 60 percent inpatient and 40 percent outpatient revenue (i.e., $300 million in inpatient revenue and $200 million in outpatient revenue). The denials rate on claims submitted is 5 percent, with inpatient claims representing a higher average dollar amount per claim but a smaller portion of total denials. In other words, denials of outpatient procedures exceed denials of inpatient procedures in pure numbers. These denials typically affect outpatient claims with lower dollar amounts, often appear as underpayments, and are difficult for General Hospital to identify due to an ineffective contract system. There also is a high volume of denials for the specific procedures. Due to the difficulty in identifying and appealing these denials, the majority are written off. 

For General Hospital, the total revenue reduction related to denials is $25 million ($15 million on inpatient claims and $10 million on outpatient claims). However, outpatient revenue is expected to constitute 50 percent of the hospital’s revenue over the next few years. If that amount of revenue were $300 million (i.e., rising to match inpatient revenue), with a 5 percent denials rate, the potential revenue reduction due to denials of outpatient procedures could grow to $15 million—the same amount that is at risk currently with inpatient revenue, but without the same effective means of tracking and appealing the denials. 

Taking Steps to Address Hidden Financial Risk

What can hospitals do to address the growing hidden financial risk they face, as portrayed in the General Hospital example? Identifying the reasons for denials is the first step to implementing an effective process for reducing denials. 

Because most payers use the American National Standards Institute standard 835 transaction to transmit payment to providers electronically, hospitals can leverage information from this transaction set to track and analyze trends in claims. Through careful analysis of claim adjustment reason codes (used by payers to indicate why a claim was paid differently than it was billed) and the remittance advice remark codes (used to provide additional explanation for an adjustment), hospitals can organize these data into denials categories by payer and identify patterns and potential key problem areas. This process will enable healthcare finance professionals to target the areas that are most problematic for the organization. For example, by compiling the highest-volume denied procedures by payer and adding up the dollars lost over time, healthcare finance professionals may uncover significant potential for revenue to be recaptured and protected.

Once healthcare finance professionals have taken this step, they should “triage” denials on an ongoing basis to make sure the revenue cycle department is staying on top of denials and appealing denials in a timely manner. This process will be difficult using manual methods, such as spreadsheets that have to be refreshed by someone keying in claims data. Such an approach requires that the department divert limited resources to the task and cannot provide timely information needed to meet payer appeals deadlines. 

A more effective approach is to deploy a system that will monitor and automatically alert revenue cycle staff of a denial as soon as it occurs (via the 835 transaction) and provide automated workflows for managing the appeal process. Such automated workflows are different from simply setting up “work queues.” Often, hospitals have systems that will push denied claims into a work queue by payer, department, or other user-defined criteria—an approach that provides the revenue cycle team with a list of denied claims by specific category, but does nothing to facilitate the appeals process. Appealing denials requires information and input from multiple parties in the organization, and such information is critical in deciding whether an appeal is worth the effort. The timeframe for appeals also varies by payer. Moreover, different types of denials (e.g., clinical; administrative; coding) will dictate distinct processes for review and analysis.  

True automated workflow facilitates the communication and collaboration process among team members, routing the denied claim to the responsible parties while assigning tasks, monitoring deadlines, sending reminders and escalation notices, and tracking updates. For example, for a claim denied for clinical reasons, the system will automatically highlight the denial from the 835 transaction and notify the designated patient financial services staff member via an email alert. The staff member will review the claim and add any additional information required; when complete, the system will automatically move the claim to the next professional in the review process, such as the case manager. 

The case manager will receive a task assignment notification with a due date for completing the task, such as providing information. As the due date for this task approaches, the system will automatically send reminders to the case manager and to patient financial services. The case manager may call the payer to obtain more details regarding the reasons for the denial and will add conversation notes to the claim in the system. The case manager will then recommend whether to accept the denial or pursue an appeal. Based on this decision, the system will then route the claim to the appropriate staff member or department to manage next steps. For example, if the decision is made to appeal, the health information management department will receive a task requesting that supporting documentation be attached to the claim. Once complete, the claim will then automatically be moved to the appropriate team member for processing. 

Along the way, the system creates an audit trail of activities, documenting each step. This type of advanced tracking system greatly reduces manual workload, facilitates efficient and timely responses for appeals, and ensures that processes are consistently followed by all participants.

Addressing the Hidden Threat

Denials of high-volume, low-dollar outpatient claims are becoming an increasing threat to the revenues and profit margins of healthcare providers. Because they are essentially impractical to address manually, many providers are simply ignoring this “hidden threat.” The increase in outpatient denials poses a particular threat to providers that lack adeptness in appealing payment denials. Moreover, with the implementation of ICD-10 in October 2014, there is a real chance that denials will increase for all providers. Those denials could come in the form of medical necessity- or coding-related denials or just billing errors.  

Those hospitals that wish to mitigate this increasing risk should take steps to more fully identify, track, assess, and appeal improper denials before ICD-10 goes into effect. For some organizations, the most practical, cost-effective approach will include the use of automated systems to monitor and highlight denials and expose trends that can help them focus on the claims with the greatest potential for financial payback.  

The real benefits of automation lie in the ability to monitor a broader cross-section of denials and do so not by adding more people but by enabling current staff to become more productive. The right system can become a force multiplier for the organization, protecting existing and future revenue.


Jan Kruger is COO, GRC Solutions, SAI Global Compliance, Alpharetta, Ga. 

Valerie Barckhoff is vice president, North Highland Co., Roswell, Ga.

Publication Date: Monday, February 03, 2014

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