A KPI Primer: 5 Steps for Creating Meaningful Revenue Cycle Metrics

February 18, 2015 9:56 am

By approaching KPI development methodically—using both external and internal resources—healthcare organizations can reliably examine and elevate revenue cycle performance.

Key performance indicators (KPIs)—well-defined metrics that illustrate performance—give healthcare organizations the opportunity to optimize all aspects of the revenue cycle.

Although crafting and responding to KPIs can improve financial outcomes, staff productivity, and business operations, revenue cycle departments should proceed cautiously into performance measurement to ensure they design metrics that deliver actionable information.

The following five steps serve as a KPI primer, offering a systematic development approach that avoids common pitfalls.

Step 1: Decide What to Measure

While this may seem obvious, it is not always easy to narrow down the field of potential KPIs.

Strategic versus operational measures. “There is value in both strategic and operational metrics,” says Sandra Wolfskill, director of healthcare finance policy for revenue cycle MAP for HFMA. “Strategic measures tend to focus on outcomes and generate data for benchmarking against peer organizations.” For example, aged accounts receivable (A/R) as a percentage of billed A/R by payer group is a strategic measure that highlights the collectability of accounts receivable. Hospitals that monitor this KPI using a standard definition can easily track performance over time and against other similar organizations.

On the other hand, operational measures tend to reflect processes and the way an organization conducts business. “Strategic outcome measures may be more common, however, operational process measures can more directly help you improve revenue cycle operations, especially employee productivity and performance,” says David Hammer, director of revenue cycle consulting at WeiserMazars LLP. “While it’s good to know your days in A/R or your preregistration rate, it is also helpful to know how many registrations your employees completed in a day or how many insurance verifications were missed last month.”

Large versus small account balances. Revenue cycle leaders must be careful to focus on KPIs that can “move the dial” and encourage action from hospital leaders and staff, says Hammer. “One of the best ways to do this is to apply the ‘leverage effect.’ The leverage effect, at its most basic, means the ratio of high-balance accounts to average-balance accounts, which leads to working accounts in descending-balance order. Using this KPI would tend to prioritize high-balance accounts and deprioritize lower-balance accounts,” says Hammer.

Although it’s important not to overlook smaller-balance accounts, it’s also surprising that many providers don’t maintain a laser focus on their largest A/R segment, says Hammer. For example, one integrated delivery network found that 1.1 percent of open accounts comprised 45.1 percent of the total A/R, and 2.2 percent of open accounts comprised 56.2 percent of the total A/R.

Step 2: Determine Standard Data Definitions

“This is probably the most important step, and something with which the industry has struggled,” says Wolfskill. “It is especially critical if you hope to compare your data with peers.”

Strategic measures. For many strategic-level measures, there are standard data definitions on which hospitals can rely. For example, HFMA’s MAP initiative offers 27 KPIs that cover a variety of topics from patient access to revenue integrity.

“Not only do these KPIs have well-vetted definitions, but if a hospital subscribes to the HFMA MAP App, it can receive benchmarking reports that clearly demonstrate the organization’s performance versus other similar hospitals,” says Wolfskill. “You can see the types of facilities with which you are compared, so you know the report reflects apples-to-apples comparisons.”

Operational measures. Creating definitions for process/operational measures can be more challenging because there are very few standardized definitions available. By their very nature, operational KPIs are more internally focused and designed to reflect the nuances of a particular organization.

“To define a process KPI, you should start by outlining its purpose and value,” says Wolfskill. “What are the measure’s benefits? What will it show? What are you going to do with it? Keep in mind that a KPI needs to be actionable and highlight when performance is going in the right or wrong direction.”

Next, look at how others define the metric. “Seek out what your peers are doing by attending conferences, webinars, and reading industry literature,” says Hammer. “There are several professional organizations that offer sample process measures, including the American Health Information Management Association, the National Association of Healthcare Access Management and the Medical Group Management Association.”

Organizations should also consult with internal stakeholders, such as patient access managers, claims processing professionals, denials management staff, and revenue cycle leadership to make sure a potential definition captures valuable and relevant information. “It can be helpful at this stage to share any information gleaned from industry sources, so that the people refining the measure have something to react to,” says Hammer.

Step 3: Define the Calculation

Once all the relevant input is gathered, spend time defining the calculation. There are several key parts to address:

The numerator and denominator. Note that these elements must be easily replicable from month to month to ensure consistency across time. For example, the formula for net days in A/R is:

Numerator: Net A/R

Denominator: Average Daily Net Patient Service Revenue (PSR)

HFMA’s MAP Key (KPI) definition includes the following clarifications to produce a standard definition:

  • Numerator: Net A/R at month end is net of allowances for uncollectibles, discounts to third parties, and self pay discounts. It includes outsourced A/R not classified as bad debt. It excludes credit balances, nonpatient A/R related to third-party settlements and nonpatient A/R.
  • Denominator: Average daily net PSR is the most recent three-month total net patient service revenue divided by days on the period. Net PSR is defined as gross patient service revenue minus contractual allowances minus charity allowances minus bad debt allowances. It includes Medicare disproportionate share hospital (DSH) payments but excludes Medicaid DSH.

This example illustrates the complexity of the KPI and the degree to which one must go to produce standardized data.

The measurement timeframe. “You should only measure as frequently as you’re going to act,” says Hammer. “For instance, if you are planning to respond to monthly data, then there is little need to collect information on a daily basis. Besides, overly frequent data collection can be both resource intensive and frustrating to your team.”

Inclusions and exclusions. These will refine the metric and ensure it accurately reflects the information that is being studied and evaluated. “Inclusions and exclusions are key,” adds Wolfskill. “They ensure standardization and comparability. An example of an inclusion is ‘any bad-debt cash collected at point of service is included in the amounts collected at point of service.’ An example of an exclusion is ‘the exclusion of credit balances from aged A/R calculations.’”

A single source of truth. A key development step is deciding where KPI data will come from and how it is to be collected. Depending on the measure, data can be pulled from various locations, including a practice management solution, data warehouse, or registration software.

“When deciding on a single source of truth, organizations may want to bring IT staff and revenue cycle stakeholders together to consider all options and pinpoint the source that is most accessible, accurate, and comprehensive,” says Hammer.

For example, IT and revenue cycle staff should collectively define each numerator and denominator and agree on a single source of truth from which the data used for the calculation will be drawn, Hammer says.

Performance thresholds. Revenue cycle leaders may be able to define these right away based on industry standards, or they might want to wait to determine an internal baseline and then set new targets from there.

Step 4: Document the Details

To ensure a KPI is consistently replicable, organizations should be intentional about documenting the measure’s purpose, calculation, and data sources. “Double check that anyone can access information about the metric and replicate it, if necessary,” says Wolfskill. “All too often, one individual manages the KPI and, if something happens to that person, the organization is forced to start over from square one.”

Step 5: Be Transparent with Staff

“Before rolling out a KPI, educate employees on the metric, being clear about the definition, the data source, why you are looking at this particular KPI, and what you are going to do with the data,” says Hammer. “That way, when they see the dashboard that shows their performance, they know how to interpret it and put it into the right context.”

Walk Before You Run

Leveraging KPIs is not an all or nothing prospect. “Don’t try to create and onboard 50 KPIs all at once,” says Wolfskill. “Start small, perhaps with five, and then add to them. Otherwise, you will get overwhelmed with data. Measures that explore patient access are a good place to start because it is the lynchpin of revenue cycle success. If you don’t get patient access right, then the revenue cycle can fall apart downstream, resulting in an increase in rejections and denials.”

Creating robust and detailed KPIs is just the first step in effective performance measurement. Going forward, organizations must operationalize their KPIs and respond to positive and negative data trends. Ultimately, it is what revenue cycle leaders do with the KPI data that will change performance. By celebrating wins and responding to improvement opportunities, organizations can ensure they fully leverage data to optimize the revenue cycle.

Related articles

Kathleen B. Vega is a freelance healthcare writer and editor who contribute regularly to HFMA Forums.

Interviewed for this article:
David Hammer is director of revenue cycle consulting, WeiserMazars LLP, Atlanta, and a member of HFMA’s Florida Chapter.

Sandra Wolfskill is HFMA’s director of healthcare finance policy and revenue cycle MAP.

Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

  1. What unique revenue cycle KPIs does your organization monitor?
  2. What value has your organization gained from comparing performance with peers?


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