Derek A. Bang
Standardized data, tools, and metrics can improve the dialogue between the revenue cycle and finance functions while streamlining and enhancing the net revenue reporting and budgeting processes.
At a Glance
- Implementing a standardized financial reporting and revenue cycle monitoring platform can help healthcare organizations improve their net revenue reporting and budgeting processes.
- Consistent, standardized data help the finance office estimate accounts receivable reserves more accurately, streamline the month-end closing process, and strengthen internal controls.
- The benefits of standardizing the finance and revenue cycle functions are particularly significant in large organizations with multiple facilities, but even single-facility providers can benefit from improved communication between the business office and finance.
Healthcare providers today face increased pressures on net revenue from payers, continued uncertainty about ongoing reform initiatives and new delivery models, and the general financial pressures of a still-struggling economy.
Reflecting these challenges, a recent Moody's Investors Service report rated the outlook for the not-for-profit healthcare sector as negative for 2012 (U.S. Not-for-Profit Healthcare Outlook Remains Negative for 2012, Jan. 25, 2012). The Moody's outlook is based not only on general economic and regulatory risks, but also on potential investment losses caused by volatility in the equity and bond markets, lower rates of healthcare utilization, and an increase in exposure to government payers and self-pay patients. One mitigating factor Moody's notes is an expected increase in merger and acquisition activity, which can help providers improve their competitive positions and gain leverage with payers and suppliers.
Even this potential bright spot presents challenges, however, as growing or newly formed organizations struggle to bring together disparate accounting systems and different approaches to financial reporting. Even in nonmerger circumstances, communication and coordination between the financial reporting and revenue cycle functions are often impaired by disconnected reporting systems, a lack of transparent and meaningful reporting, and limited or nonexistent formal processes for communication.
The Gap Between Finance and Revenue Cycle
Although net revenue reporting integrity is always a critical concern, the ability to quickly identify operational issues that may be affecting net revenue is increasingly consequential in today's environment. As the office responsible for establishing and maintaining reserves, the finance team oversees the net revenue reporting function and implements adequate controls and systems to facilitate integrity and ensure accuracy of reserves. However, finance does not typically have day-to-day exposure to the flow of the transactional activity.
The revenue cycle team, on the other hand, is responsible for the flow of transactional activity, but is generally not familiar with the process of establishing reserves or explaining accrual-based net revenue.
Although their specific activities are different, the finance and revenue cycle processes are closely linked, so the two teams should work together to maintain reserves at the appropriate levels. Yet this collaboration is often strained, for a number of reasons.
Disconnections between accounts receivable (A/R) and the general ledger. Although the general ledger creates high-level financial statements for external reporting, the A/R subledger typically draws information from disconnected systems. Patient accounting software usually is highly specialized, accommodating a range of specific functions such as preadmission benefits certification, clinical coding, scheduling, and account charges based on a variety of criteria. It also performs typical back-end A/R functions, such as billing and collections. The finance office uses the information that is posted-often without seeing the actual transactional data-and then uses historical models and other information to calculate its reserve estimates.
Disparate patient accounting systems. In large organizations that operate multiple facilities, several different patient accounting systems may be in use. This situation is particularly common in organizations that have grown through acquisitions, as individual institutions continue to operate their legacy systems. When the various facilities report data from their individual patient accounting systems and internally developed spreadsheets, the finance office cannot perform consistent, apples-to-apples comparisons and faces a considerable challenge in converting these disparate data formats into workable data for developing reserves.
Inability to drill down into individual accounts. When linking to the general ledger, the A/R subledger posts high-level data, such as gross revenues and several major categories of deductions and write-offs, but this information generally is captured and stored in a way that is not dynamic. The finance office might not be able to drill down into specific accounts, so when actual results vary from expectations, determining where the variation originated can be difficult. Moreover, patient accounting systems that are large, cumbersome, and not user-friendly do not facilitate analytical work at the local level.
Lack of visibility into the impact of the revenue cycle on the income statement. When a local institution's business office or third-party revenue partner makes an adjustment to an account, the responsible party often has no way of evaluating that action's impact on the financial statements. For example, many revenue cycle teams periodically write off groups of accounts that have been deemed uncollectible, usually near the end of a reporting period. Often, those who take these steps have little reason to consider larger questions: What effect will this action have on net revenue? Have reserves been established for these specific accounts? Will the write-off be expected by the finance office? Will the finance team have the information it needs to appropriately adjust reserves and other accounts?
Varying performance metrics. The lack of understanding of the effect of revenue cycle decisions on the overall finance picture is closely related to another issue: The metrics by which the revenue cycle team measures performance are often disconnected from the concerns of the central finance office. Such differing performance metrics inevitably lead to the revenue cycle and finance functions having different priorities.
For example, when revenue cycle management is evaluated on measures such as average days outstanding, charging off accounts that present little likelihood of collection helps lower this closely watched metric. Although such cleaning up of accounts will improve the A/R picture, these efforts can significantly affect reserve calculations. In fact, experience suggests that most of the unusual or unexpected fluctuations in net revenue numbers can be traced to unanticipated changes in prior estimates to older accounts.
Similarly, business offices often have little incentive to focus attention on credit balances, which have no apparent effect on cash collections. Yet a spike in credit balances (due, for instance, to double posting of a discount or invoice processing errors) can have a significant negative impact on net revenue because, without clear communication, the finance team likely would assume a spike in credit balances is an increase in liabilities.
Lack of time, resources, or technology for in-depth account analysis. Due to the complexity and variability of systems, analysts spend most of their time gathering data and preparing schedules rather than actually analyzing account characteristics. Moreover, at the local level, many patient accounting systems are not set up to do query and research work in a convenient or streamlined fashion. As a result, even the best-intentioned effort at improving communication between the revenue cycle and finance teams can produce disappointing results.
Bridging the Gap:The Outline of a Solution
Overcoming these issues requires a standardized approach to data collection, centralized reporting and monitoring, and a consistent process for individuals to follow. Such an approach facilitates net revenue reporting, planning, and auditing by implementing a system of centrally stored revenue cycle data with standardized reserve estimation and net revenue reporting.
This approach enables more accurate cross-platform comparisons and reporting by providing a leveling tool for the various patient accounting systems that are in place across a health system. Moreover, such a tool can serve as a springboard for various operational analyses beyond traditional financial reporting.
In addition to overcoming the non-user-friendly nature of many patient accounting systems, the revenue cycle staff can produce convenient reports that help them monitor net revenue activity in a way that supports more meaningful dialogue with finance.
For its part, the finance office can help make sure the revenue cycle function is operating appropriately by communicating with revenue cycle staff throughout the month and by training revenue cycle personnel to observe trends and unusual net revenue activity regularly rather than only during the closing cycle. In addition to reducing the number of last-minute preclose surprises, this approach lets the local business office provide more meaningful and timely feedback regarding reserve levels and related activity.
A Solution in Action: Ascension Health
At Ascension Health, the largest Catholic not-for-profit health system in the nation based on revenue, the need for a system to bridge the gap between the revenue cycle and finance teams became apparent over a period of several years. The ministries of Ascension Health operate more than 1,400 locations, including 80 general acute care, long-term care, rehabilitation, and psychiatric hospitals in 21 states and the District of Columbia.
As Ascension Health's centralized finance office worked to provide consistent, reliable financial integrity reporting to the bond and credit markets and to accelerate the monthly closing process, it found itself facing an increasingly challenging burden each month-end. Ascension Health began taking action to address these challenges at the system level in 2007.
To help streamline financial reporting and improve communication between the revenue cycle and finance functions, Ascension Health deployed an analytics tool that was originally developed at several of its local facilities. The tool, a consolidated finance and revenue cycle software platform, had successfully bridged the gaps between patient accounting and finance at the local levels and was being implemented on an incremental schedule throughout the system.
For example, a common question was, "Why are Medicaid contractual allowances greater than gross Medicaid revenue?" The tool quickly showed the prior period's patient accounts that had flipped payers and created a change in prior estimate that was affecting the current month's net revenue. Another example of the tool's value was its ability to rapidly identify new credit balance accounts that likely were posting errors that affected current-period net revenue, which highlighted an operational revenue cycle issue and allowed finance to adjust its accruals. Based on the tool's success and the significant need for improved coordination, Ascension Health accelerated the deployment schedule so that by mid-2009 the new system had been installed successfully throughout the entire organization.
The system provides a platform for standardized reporting processes across all facilities and establishes a centralized financial database stored on dedicated servers that are accessible from every local hospital. The local facilities now feed patient accounting and related revenue cycle data into the database daily and may access the database via the web to perform a broad range of analytical and financial reporting functions.
This centralized platform provides the capability for facilities to calculate and report data in the same way, regardless of the specific accounting software that feeds into the A/R subledger. It also provides both finance and the local business offices an array of previously unavailable analytics tools. Analysts can drill down to examine specific accounts. Because both the finance and revenue cycle teams are accessing the same data in real time, they are able to monitor activity daily and collaborate throughout the month rather than react to discrepancies or questions at month-end.
The same software tool is used to estimate reserves and update the balance sheet. Because it separates current-period actual revenue from changes to prior estimates, it allows both the local business office and the central finance office to recognize the effect that adjustments to net revenue have on the income statement. The exhibit below shows an example of the dashboard's analytical reporting separating current-period net revenue activity from changes in the prior estimate.
Beyond Reporting: Operational Benefits
Beyond streamlining financial statement reporting and establishing reserves, Ascension Health's centralized data collection tool has paved the way for additional benefits. For example, daily cash reporting across the entire health system is now streamlined and can easily be collected for ongoing monitoring and comparison with net revenue. In addition, because the system is capturing and storing net revenue data over time, users are able to create histories that reflect seasonality, realization rates, and other factors and then use those data to budget net revenue for up to five years, as illustrated in the exhibit below.
The Ascension Health approach has also allowed enhanced benchmarking of revenue cycle performance. In the past, the organization used a spreadsheet-based hospital survey to collect revenue cycle performance benchmarking information throughout the health system. The process of conducting surveys was time-consuming and difficult to standardize, given that many different patient accounting systems are used throughout the health system and revenue cycle processes are not centralized. For example, some hospitals apply contractual allowances to accounts at the time of billing, which can skew the comparison of a metric such as "gross days in A/R" across the system, as some A/R are held at gross and some are held at net.
As such, Ascension Health therefore began an initiative for identifying specific high-level financial key performance indicators that could be automated using the centralized data collection tool, which would normalize the indicators across all facilities and automate the reporting of the critical financial metrics that supported them.
Ascension Health is using the tool to set performance expectations for the management services and to measure performance. The tool allows the measurement of performance to be generated by a trusted data source that links directly to the financial statements. The goal is to avoid controversy about the results and keep the focus on performance. The exhibit below illustrates the performance measurement.
Consistency, Clarity, and Communication
Implementing a centralized financial reporting and revenue cycle platform can provide today's healthcare organizations with important advantages as they respond to the challenges of continued downward pressure on revenues, ongoing regulatory changes, and long-term consolidation of the industry.
Improving communication between the finance and revenue cycle functions and providing a consistent, standardized set of data, tools, and metrics that are accessible to all concerned parties enables the finance office to estimate A/R reserves more accurately, streamline the month-end closing process, and strengthen internal controls.
Although the benefits of this approach are most obvious in large organizations that operate multiple facilities in various locations, the approach is equally applicable to smaller providers, including single-site facilities, and applies to both for-profit and not-for-profit organizations. Above all, such an approach facilitates open dialogue and a strong, collaborative relationship between the revenue cycle and finance departments. In such an environment, both teams can achieve their goals more consistently-thus improving both net revenue integrity and overall operational effectiveness.
Kari Clark, CPA, is manager of revenue integrity, Ascension Health, St. Louis, and a member of HFMA's Greater St. Louis Chapter (firstname.lastname@example.org).
Derek A. Bang, CPA, CGMA, is partner and healthcare advisory services leader, Crowe Horwath LLP, Indianapolis, and a member of HFMA's Indiana Pressler Memorial Chapter (email@example.com).
Publication Date: Monday, September 03, 2012