Revenue Cycle

Shelby L. Boggs

At a Glance 

  • There are two key differences between hospitals and physician practices in revenue cycle management: unit of work and its value, and per unit cost to collect.  
  • Reducing a physician practice's cost to collect requires, first and foremost, the right technology and functionality and the right staff.  
  • Three advanced collections techniques-denials management, contract compliance, and fee schedule management and maintenance-should be examined for their potential value in ensuring that an owned practice is paid correctly for every service.  

One of the major challenges today's hospitals face is managing the bottom line of hospital-owned, community-based physician practices-a task that is made even more difficult when the practices are "forced" acquisitions.

When hospitals and health systems first began purchasing physician practices in the 1990s, purchase criteria and motivations were very different from what they are today. Although a hospital would likely consider the practice's financial stability, the real purchase driver was the practice's ability to direct specific types of admissions or referrals to the hospital. Once an acquisition occurred, there was little need for hospital executives to offer the practice-based providers incentives either to increase productivity or to increase referrals to the hospital.

Today, there is a renewed need for hospitals to acquire physician practices. However, the old business model for practice management is impractical given significantly reduced reimbursement, increased expenses, and an acute need for providers to make major investments in technology. Hospitals no longer purchase physician practices because they wish to gain market share. Instead, they buy practices to stabilize their physician communities and prevent dissolution of their referral bases. Although hospitals recognize that it is better to lose some money on an underperforming practice than to lose all of the financial potential from a referral source, they also are seeking quantifiable opportunities to improve their acquired practices' financial performance and minimize potential losses.

Many organizations have tried to improve physician practice performance by simply transferring strategies for hospital revenue cycle management to the management of these practices. However, most of these efforts have minimal impact because the drivers of the physician revenue cycle are different from those of a hospital revenue cycle-and thus, so are the optimal revenue cycle management techniques.

To understand practice financial performance, set measurable performance expectations, and monitor against them, hospitals should first understand the distinct differences in revenue cycle management between hospitals and physician practices. Then, hospitals should provide support for the implementation of practice-specific revenue cycle management strategies that will allow the practices to meet expectations.

Distinction No. 1: Unit of Work and Its Value

The first major difference between hospital and physician practice revenue cycle management is basic: the reimbursable unit of work. Hospital financial managers are accustomed to having their organizations be paid based on a "patient day" or an "admission." Although hospitals generate individual charges for the services a patient receives, these charges generally are considered collectively by a payer and then either paid for (or denied) collectively as well. The reimbursable value of a hospital day or an admission is usually in the hundreds or thousands of dollars.

Compare this with the physician practice setting, where charges also are generated based on the services or procedures provided. For practices, however, payers usually consider each physician charge individually and make payment decisions at the service level. As a result, the unit of work and its reimbursable value is much smaller: A single Current Procedural Terminology (CPT)/service code may be worth only tens of dollars.

Distinction No. 2: Cost of Collections

The next real difference is the cost to collect on a "unit of work." On the hospital side, claims submission and collection costs generally result from the human resources associated with charge entry, billing submission, and follow-up when a claim is not paid as expected. If a claim is denied, the hospital incurs additional costs for pulling the patient's record and submitting it for review. Because hospitals tend to have dedicated resources for billing and collecting-and fairly automated medical records departments-these processes are relatively simple.

Dedicated resources and automation are less apparent in most physician practices. Responsibilities for billing and collecting are either part of a specific employee's job or shared among staff. Tasks such as finding and retrieving office notes to support a denied claim are often manual. Less technology and a much less sophisticated infrastructure result in a greater need for human intervention-and thus a higher cost to collect for a practice's unit of work.

Consider a highly simplified example. A patient is admitted to the hospital for three days. The hospital bills the patient's insurance company $9,000 ($3,000 a day). The insurance company pays for two days, but denies the third day on the basis of medical necessity and requests the patient's medical record for review.

The hospital finance department receives the denial and forwards it to its medical records department. The medical records clerk looks up the patient's records, creates a PDF of the appropriate pages of the patient's electronic chart, attaches the PDF to an e-mail, and sends it to the payer. This process takes about 10 minutes. The originally denied $3,000 is paid 30 days later, and the hospital's per unit cost to collect is as follows:

Unit value = $3,000.00  
$40,000 finance clerk:    $1.60 (5 minutes)
$40,000 medical records clerk:    $3.20 (10 minutes) 
Cost to Collect: $4.80 (0.16 percent of the claim) 

To carry the example forward, imagine the same patient is seen a week later in a physician's office. In the context of an established patient office visit (CPT code 99213), the patient has a benign lesion removed (CPT code 17000). The patient is insured by Medicare, so the expected reimbursement for the two codes (based on the 2010 fee schedule) is roughly $65 and $70, respectively. Medicare pays for the office visit, but denies the procedure based on the diagnosis code on the claim.

The practice receives the denial. Someone reviews it, manually pulls the paper chart, sorts through it, finds the right note, and marks it. The chart is placed on the physician's desk. The physician reviews the chart, decides that the diagnosis is incorrect, writes a note back, and returns the chart to his staff member. The employee then logs into the billing system, changes the diagnosis code, and rebills the claim. The claim is paid 30 days later. The per unit cost to collect in the office setting, then, is as follows:

Unit value: $70.00   
$40,000 office staff person   
Reviews denial:1.5 minutes
Pulls chart:1.5 minutes
Identifies appropriate note for physician:3 minutes
Reviews physician's response:1 minute
Repairs and rebills claim:2 minutes
Total staff cost to collect: $2.88 

$200,000 physician  
Review charts and notes:2 minutes
Notes change for staffer:1 minute
Returns chart to front desk:1 minute
Total physician cost to collect:   $6.41  
Total practice cost to collect:  $9.29 (13.27 percent of the claim)  

Reduce the Cost to Collect

Recognizing that there are two significant and distinct differences between hospital and physician practice revenue cycle management, hospital managers responsible for practice revenue cycle management should focus on activities that minimize the cost to collect and optimize the reimbursement per unit of work. The key is to promote policies, processes, and strategies that ensure a sophisticated revenue cycle management infrastructure.

The right technology and functionality. The right technology can help practices both minimize the cost to collect and optimize reimbursement. Most hospitals already reap the benefits of IT within revenue cycle management workflows. To raise the level of IT sophistication in owned practices, hospitals must make sure that certain functionality exists within their practices' practice management software to automate three critical physician revenue cycle management processes:

  • Contract management
  • Front-end claims editing
  • Denials management

If implemented and used correctly, newer capabilities such as workflow automation can also produce quantifiable operating efficiencies and cost reductions in specific revenue cycle activities.

Contract management capabilities enable practices to ensure they receive not just payment, but correct payment at agreed-upon rates. These capabilities also give managers the tools to leverage any identified differences to recover cash and alter payer behavior.

Robust claims editing functionality helps practices proactively address the increasingly complicated claims payment and reimbursement rules. By better controlling the quality of claims before submission, practices can increase cash turnaround while also decreasing denials. The result is a decrease in the overall unit cost to collect.

Denials management modules allow practices to identify, track, trend, and report on denials. Using data, managers can pinpoint the source of denials (whether a practice-based process, a provider error, or a payer mistake), as well as any systemic causes, and take action to correct the problem.

Workflow automation tools allow staff members to set parameters under which specific activities, such as A/R follow-up, will occur automatically. These tools also reduce the cost to collect by eliminating manual processes (e.g., communicating claim repair information via notes or running standard management reports).

The right staff. Salaries and benefits generally constitute the largest practice expense. Therefore, effectively hiring and, more important, retaining qualified billing staff are among the most effective ways to reduce a practice's cost to collect.

As the rules and regulations surrounding provider reimbursement have increased dramatically over the past few years, so has the need for technology to automate processes that handle these complexities. As a result, the knowledge and expertise required of practice-based billing staff has increased exponentially. Practices now require virtually the same (if not a greater) level of staff billing expertise as hospitals. Hospitals should avoid the temptation, however, to simply shift their own coders, billers, and collectors to their physician practices.

Effective practice-based billing staff should have detailed knowledge of the billing rules for the medical specialties the practice provides. They should be able to understand and monitor specialty- and procedure-specific claims requirements for the payers that matter most to the practice.

Optimizing the Reimbursable Unit of Work

Realistically, most community-based practices have little or no leverage to negotiate rates. Therefore, increasing a practice's bottom line by increasing its contracted rates (or reimbursement per unit) is not likely. However, implementing advanced collections techniques can help ensure a practice is paid correctly for every service-therefore optimizing payment per unit of work. Three techniques in particular should be examined for their potential value:

  • Denials management
  • Contract compliance
  • Fee schedule management and maintenance

Denials management is the process by which a practice tracks, trends, and evaluates its "zero pays"-those CPT codes for which it receives no payment, but attempts to recover payment when appropriate. Industry studies report that more than 35 percent of claims may be denied improperly. In any size practice, a number of this magnitude represents a significant revenue cycle opportunity. Any payment a practice recovers as the result of denials management increases the practice's overall reimbursable unit of work.

Contract compliance-a practice's ability to compare actual payments received from a payer with its contractually agreed-upon rates-is no less critical. The same industry studies also find that up to 25 percent of a practice's contractual allowances may be taken inappropriately and represent potential underpayments.

To state it simply: Practices cannot afford to assume claims are processed appropriately. Payer consolidation, complex contract terms, and human error all contribute to a growing concern over inaccurate payments.

Effective contract compliance monitoring requires that practices know their contractually agreed rates. Automating the process further requires that rates be accurately entered and maintained in the practice management system. In addition, fee schedule ("chargemaster," in hospital terms) management should be implemented similarly. Because few patients actually pay full charges, fee setting often is discounted and underused as a revenue cycle management tool. Today, most payers set their rates as a fixed percentage of the current Medicare fee schedule. Likewise, payer contract language generally sets payment terms as the lesser of either the practice's charge or the payer's agreed-upon rates. When insufficient attention is given to fee setting, practices run the risk that their charges will be less than the Medicare allowable (especially over time). In such cases, practices receive a lower reimbursement per unit of work than they should.

Worth the Time, Expense, and Effort

Hospitals can no longer afford to overlook the revenue cycle performance of their owned physician practices. Strategies should be implemented to minimize losses and improve the financial performance of these practices.

Hospital managers can achieve success by implementing a sophisticated revenue cycle management infrastructure-including technology, people, and processes-and by focusing on techniques that optimize reimbursement per unit of work and minimize a practice's cost to collect. These efforts may require financial commitment and reorganization of practice policies, staff, and technology. However, in practices where revenue cycle performance is weak, the improvement in outcomes will likely justify the time, expense, and investment.

Shelby L. Boggs is a vice president, NextGen Practice Solutions, Hunt Valley, Md., and a member of HFMA's Maryland Chapter (

Publication Date: Wednesday, September 01, 2010

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