Generally, hospitals use a set of key indicators to gauge how well they’re performing financially. The numbers represent overall indicators, such as days in accounts receivable, cost to collect, or cash receipts as a percentage of net revenue. The indicators are important because, in total, they indicate signs of strength or distress.
What they don’t do, however, is get to the root of any problem. To target causes providers need to delve deeper and look at the individual performance of their payers. That’s where key performance indicators for managed care come in.
Depending upon a provider’s strategic goals, KPIs are used for any number of reasons, from negotiating better contractual terms to tracking negative trends and identifying problem areas.
The key is using the indicator, or measure, to manage the performance of the managed care payer. “That’s the idea behind why organizations need to use key performance indicators for managed care contracting,” says David Hammer, vice president of revenue cycle solutions for Atlanta-based McKesson Provider Technologies, a healthcare information technology company. “The objective is not measurement for its own sake; the objective is to improve each payer’s results.”
Focus on the Core
To be effective, providers should focus on a handful or two of indicators, rather than a long list. Any higher, and the financial analysis becomes too cumbersome. What one provider chooses to use may not be what another chooses, Hammer says. To begin with, hospital administrators should work out the focus of the KPIs. “That’s really important, to sit down and get all the stakeholders involved to discuss what it is that is really important,” Hammer says. “In some hospitals, maybe it’s the overall A/R [accounts receivable] performance and denials. At other hospitals it may be the contribution margin.”
Likewise, Hammer says providers should apply the 80/20 rule and use KPIs for those payers, say five to 10, that represent the highest volume and bring in the greatest revenue.
Providers should monitor such KPIs monthly and meet with payers to discuss problems at least quarterly, or more often if necessary.
A handful of core KPIs include:
- Net and Gross Revenue
- Number of Days from Receipt of Claim to Payment
- Days in Accounts Receivable
- Underpayments/Overpayments as a Percent of total outstanding A/R
- Denials/Appeals as a Percent of Net Revenue
- Bad Debt as a Percent of Overall Revenue
Net and gross revenue indicate what’s going on with the volume of a particular payer. “Is it going up? Is it going down? Are they sending you more patients? Are they maybe redirecting patients away from you?” says Roland Funsten, vice president of revenue cycle operations for Accretive Health, a Chicago-based management services firm.
The number of days from receipt of a claim to payment of a claim can identify a problem with the payer’s claims processing performance, Funsten says. Or it can undercover a few surprises. For example, by using this KPI, a former hospital employer in Florida determined that a small payer using paper claims processing system actually performed better than some of the larger payers that used electronic claims processing, he says.
A hospital wants to identify underpayments to recoup lost revenue.
Overpayments are important to identify, as well, because they are errors and represent additional work for the provider to resolve. They also signal potential problems with a payer’s process or interpretation of the contract, Funsten says.
The number of days in accounts receivable is a very accessible and common financial indicator. The specific number that is identified as a problem may differ from one facility to the next. Funsten says A/R greater than 60 days is a good indicator. “Obviously, payers are not turning around payment or processing initial claims quickly,” Funsten says. “But then what’s unresolved beyond 60 days? Those many not necessarily be in denials or underpayments; they may be in category where the payers are requesting COB [coordination of benefits] information from the patient, or there is some other reason to be delaying payment on a claim.”
The number of denials helps a provider to determine if its reimbursements are coming in according to contract, Funsten says. If there’s an issue, this KPI can be used as a tool to re-negotiate a term of the contract.
Finally, bad debt—which essentially is denials of payment by the patient—can also be used as tool to negotiate better contract terms. If a contract is worth X, but the realization is X – 20% because the patient is not paying his portion of the claim, then the payer should be making up for those lost dollars, says Jason Adams, vice president of revenue cycle for Tacoma, Wash.-based MultiCare Health System, which has four hospitals in the Tacoma area. “If we have a specific plan where, for whatever reason, the employers who are attracted to XYZ insurance company have employees who just aren’t paying their out of pocket liabilities, and we have the increased burden of administering and collecting upon these liabilities, we then obviously change our process and request additional reimbursement from those payer sources,” Adams says.
How to Apply KPIs
By themselves, KPIs create a numerical picture. But to be meaningful, they should, as noted above, be used proactively as a way to change the below average performance of a weak payer or optimize the performance of a strong payer.
In additional to negotiating better contractual terms, KPIs can also be used to:
- track negative trends
- optimize provider and payer operations, and
- rank payers.
The A/R and revenue KPIs, for example, can offer a good way to track potential problems, says David Hammer. By tracking A/R days, a provider may notice a steady increase in the number of days a claim is outstanding, while at the same time the revenue KPI from that payer may be decreasing. “That indicates a problem,” Hammer says, noting how the payer’s performance is trending downward.
The underpayment KPI may signal a problem with the claims adjudication system of the provider, payer, or both says Funsten. Perhaps some contractual terms may not be able to be effectively programmed into either party’s computer system, meaning neither one can properly administer the claim. Once the problem has been identified, the provider can work with the payer to change the term in the contract so that it can be effectively administered. “At the end of the day, I think both parties want more efficient and effective claims processing,” Funsten says.
Ranking payers and sharing the data among them can be an incentive for poorly performing payers to improve. Funsten used to send letters to payers listing KPIs for those his facility ranked, complete with gold stars awarded to strong payers. He says the rankings created a sense of competition, causing some payers to improve their performance because they wanted to achieve an efficient claims processing system and get that gold star.
Most payers, however, may need more than a gold star as an incentive to improve their performance. Adams says that rankings themselves won’t prompt a payer to improve until a provider ties a ranking to incentives, such as cutting rates. For instance, a provider may give a payer with the lowest denial rate or number of A/R days a rate cut, he says. Likewise, a poorly performing payer who wonders why its rates are so high can be shown what it would take to receive a rate cut by comparing its KPIs to those of a strong payer. “I think that is what would motivate the managed care payers,” Adams says.
Don’t Wait--Negotiate Often
Providers shouldn’t wait until it’s time to renegotiate a contract to bring up issues detected by KPIs. Rather, quarterly meetings between providers and payers can bring issues to the table shortly after they’re detected, meaning solutions can happen faster. If KPIs give a provider the leverage to bring about a change that will improve reimbursement, why wait? The result of not only waiting to discuss issues, but not using KPIs at all can directly affect a provider’s bottom line.
Funsten says it’s been estimated that hospitals may be losing out on between 2 and 3 percent of revenue because of payers that aren’t performing according to contract or as well as other payers. “For many hospitals, those numbers can be the difference between operating in the red and operating in the black,” he says.