In the 1990s, hospitals scrambled to sign managed-care contracts. Now they're trying to figure out how to get paid under the complex terms of those agreements.
Carve-outs, capitation, bundling and variable per-diems have created a headache for providers, but they've been a boon for consultants and software vendors that specialize in helping providers get what they're owed. Services are being marketed by many names: managed-care recovery, contract management and contract auditing, to name a few.
Rising accounts receivables, increasing bad debt, delayed and denied claims and generally lousy collections have made revenue-cycle management the hottest consulting gig in the healthcare industry, according to a recent report released by the Fitch credit-rating agency. More than 70 firms specializing in patient accounting and collections exhibited at this year's Healthcare Financial Management Association Annual National Institute at San Antonio in June.
"Everybody's looking for a few more dollars. And when you exhaust what your potential is on the cost-reduction side, which many hospitals have, (you) are looking to expand the revenue base," says William Cleverley, president of Columbus, Ohio-based Cleverley and Associates, a healthcare information and consulting firm. "Many (hospitals) are finding that they have not been paid appropriately under their managed-care contracts."
Cleverley says hospitals are concentrating on three areas: detecting underpayments, making sure that all services are billed, and eliminating payment denials.
Evidence is mounting that contract management is becoming a critical component of hospitals' financial arsenal. The respected Washington-based Health Care Advisory Board has estimated that a 350-bed hospital with annual revenue of about $100 million and managed-care penetration of 40% could save $3.3 million annually by reducing denials and underpayments.
In some respects, healthcare is following the rest of the economy, which is experiencing increasing complexity in contracting. In February, investment banking firm Goldman Sachs & Co. issued a report that predicts an explosion in the market for contact-management software, estimating that it will become a $3.1 billion industry by 2005. The firm estimates that companies of all types spend about a half-percent of their revenue managing contracts and could slash those costs by at least half with special software.
In healthcare, some consultants say hospitals could reap savings by improving the efficiency of the collections process and making sure they collect everything they're owed.
Healthcare Financial Enterprises in Fort Lauderdale, Fla., says it "recovers" an average of $1.2 million in underpayments annually per hospital by using proprietary software to compare a hospital's actual reimbursements during the previous year with what it should have been paid according to the contract. Since it was founded in 1990, the firm has had about 500 hospital clients with average annual revenue of $80 million, about 40% of it from managed care, Vice President William Phillips says.
Phillips says typical reasons for shortfalls are insufficient billing staffs, lack of financial incentives for employees to increase collections, and a failure to use physicians to document medical necessity. As a result, he says his firm finds errors in nearly a quarter of all claims, nearly all favoring payers. "All that money arguably should be going to hospitals," he says.
EHealthContracts, a Hayward, Calif., company founded in January 2000, sells software that allows both providers and payers to analyze and monitor contracts. So far, the firm has announced contracts with three California hospitals. President and Chief Executive Officer Helen Wilmot, a former administrator at Oakland, Calif.-based Kaiser Permanente, estimates that 800,000 contracts are negotiated annually by hospitals, physicians and other providers. Her firm estimates that as much as 2% of the $700 billion that flows through healthcare contracts annually is wasted through inefficient negotiations, claims processing and reconciliation procedures.
Wilmot doubts that contracts can be simplified. "The payers will never be able to agree on a consistent standard contract," she says. The immediate solution for both sides is to understand the contracts they sign and to hold the other party accountable, she says.
Given the financial strains of insurers, it appears payment difficulties will continue.
In the past three years, 694-bed Brigham and Women's Hospital in Boston launched a concerted effort to track the reasons for its claims rejections in order to identify and correct problems that lead to payment denials. The bulk of denials resulted from simple provider errors, such as failing to submit paperwork for a referral, hospital officials say (See chart). Yet the hospital has found that when it resolves one issue, another crops up, making it difficult to significantly reduce the amount of rejected claims, Chief Financial Officer Roger Deshaies says.
He says denials "have become so important for insurance companies in generating savings that it's going to be very difficult to eliminate them overnight."