Credit Balances Present Risk And Opportunity

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December 31, 2003

Credit balances are difficult to identify and tough to resolve. However, beefed-up federal regulations and increased public scrutiny of financial practices have brought the problem of credit balances to the forefront of CFOs' attention. The current emphasis on reengineering the revenue cycle has also made it imperative that hospitals find a way to effectively manage credit balances, which may be distorting profitability and AR days.

Causes of credit balances

Source: CDR Associates, LLC.

Improving credit-balance resolution

Credit balances are no different from any other process in the revenue cycle. As such, any investment in improvements should result in substantial opportunities to enhance cash flow and profitability, while reducing risks.

Most important, hospitals must establish processes that ensure adherence to Medicare requirements for refunding credit balances and the filing of the CMS-838 form. Whether such processes are systematic or ad hoc, the CFO must ensure that all credit balances (with Medicare payments) are analyzed, monitored, well-documented, and reported to CMS before signing the CMS-838.

The following steps will help a hospital systematically assess and improve its management of the credit-balance function.

Assess current volumes. Determine the current dollar amount and volume of credit balance accounts. Ascertain the volume of new credit balance accounts that are being created on a weekly or monthly basis. This information is critical to determining current exposure as well as ongoing staffing needs to address the problem.

Establish goals. Determine the threshold of credit balance levels that your facility can reasonably tolerate. This target should be established not only based on total dollars, but based on the volume of accounts as well. Experts consider two days of a hospital's revenue to be an acceptable credit-balance level. So, for example, if a hospital is generating $500,000 a day in revenue, then $1 million in credit balances may be acceptable.

Review current process. Evaluate all aspects of the hospital's current process, from the identification and analysis of credit balances to the completion of forms and documentation requirements, and eliminate unnecessary tasks.

Consider dedicating staff exclusively to resolving credit balance accounts, since incorporating such responsibilities into the other duties of billers and collectors is usually an ineffective alternative. With the pressures associated with collecting cash, credit processing is usually put on the back burner, resulting in growing volumes and inadequate process management.

Automate manual processes. Because of the low priority that credit balances generally receive, many hospitals have not taken the time to streamline resolution processes. However, with a little upfront attention and an evaluation of the tools available, process automation can deliver substantial annual cash benefits.

Monitor performance. Monthly management reports should be established and reviewed to ensure that credit-balance targets are met and that compliance is maintained. At a minimum, management should generate and monitor the following reports:

Unresolved Medicare credits
Workload estimates
Progress reports that summarize new credits created and accounts resolved as compared to goals
Employee productivity
Transaction summaries to determine causes of credit balances and their final disposition

Minimize the issuance of refund checks. Issuing refund checks is a contributing factor to an inefficient and costly credit-balance-resolution process, and exposes the hospital to potential fraudulent activity.

Accordingly, hospitals should take advantage of payers' processes and systems that allow the reporting of overpaid accounts: typically, upon receipt of the notification, the payer will retract the reported overpayment on a later payment voucher, thereby eliminating the need for the hospital to issue a refund check.

Control vendors. Many payers hire external auditing firms to make onsite visits at hospitals and recover any credit balances that are due back to the payer. If properly monitored and controlled by the hospitals, these vendors can add value to the process by helping facilities clean up their books. However, to minimize the potential risks associated with these vendors, the following steps should be taken:

Require a current letter of authorization specific to your hospital for each insurance company that the vendor represents -- not a generic letter listing numerous companies represented
Only allow the vendor access to those accounts paid by the insurance company that issued the authorization letter
Insist upon voucher recoveries by the payer -- do not issue refund checks to the vendor

Conclusion

While there's nothing inappropriate about the presence of credit balances, their resolution requires ongoing efforts. Problems arise when credit balances grow or go unresolved, and a heavy volume of aging credit balances is probably a symptom of bigger issues. After recognizing credit balances as an important issue, CFOs must develop comprehensive and systematic strategies for ongoing resolution.

SOURCE:

"Credit Balances: Spotlighting a Little-Known Area of Risk and Opportunity," educational supplement to hfm magazine, January 2004. Sponsored by CBAS, a divison of CDR Associates.

Additional Resources

HFMA P&P Board Statement No. 16, "Classifying, Valuing, and Analyzing Accounts Receivable Related to Patient Services"
HFMA's OIG Compliance Checklist Series

If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble.

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