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The math behind turning bad debt into cash collections



Editor’s note: This article first appeared in the winter 2021 issue of AAHAM’s Journal of Healthcare Administrative Management.


During this long pandemic, revenue cycle management has had the daunting task of improving cash flow with fewer internal resources, amid a shift to remote work. Many organizations, faced with demand for quick change, have outsourced some or all of their business offices, hoping for the best.


As 2021 dawns, some organizations seem to have righted the ship, but as the virus rages, most continue to struggle and are having difficulty seeing a path forward. Some have established processes in the form of requests for proposals that spell out their needs, while others are calling vendors they have worked with before, with a plea that can be summarized in a single word: Help!


I have two questions for anyone thinking of outsourcing:

  • Is additional support needed immediately to improve cash flow and operational requirements?

  • Do you have an established baseline of reporting data to determine your goals for improvement (ROI)?

My past experience working with hundreds of hospitals, providers and health systems tells me that all have some key performance indicator data that they can use as a baseline to establish performance goals and decide whether to seek outside help with revenue cycle operations.


Let’s evaluate the numbers for a large, multi-hospital, safety-net health system that uses multiple vendors throughout the revenue cycle operation, from eligibility processing in registration to bad debt. At this system, the vendors seem to be performing well, according to recent year-end financial reports. Taking a harder look at the data, though, reveals some performance gaps and missed opportunities for improvement.


Annual gross patient revenue for the system was approximately $5.6 billion. After taking out the allowance for doubtful accounts, charity and contractual adjustments, net patient revenue was approximately $1.25 billion. That’s certainly a bunch of money and an improvement on fiscal year 2019 results, but it still only represents 22.5% of gross (charged) revenue. When dealing with large organizations producing large numbers, even the slightest improvement or decline can also produce large numbers and variances. As an example, if we were to assume that net patient revenue equates to payments made to accounts receivable, a 1.5% improvement to the system’s payment activity would be almost $19 million in additional cash, which could be freed to use on operations. Asking revenue cycle staff to improve cash by 1.5% seems reasonable.


Marginal change, better margins

Now let’s dig a little deeper, taking a look at collections and bad debt. The system is showing approximately $650 million in bad debt. As accounts are generally written off net of contractual allowance, this seems to be a net number. Assuming the revenue cycle leaders can get their early out vendor and internal staff to improve collections by just 1.5%, bad debt goes down and the cash position rises by almost $13 million.


So how do you make this happen?

I recommend that you start off with some baseline information. What are the total self-pay collections for last fiscal year? Can you break down these collections by straight self-pay and self-pay after insurance? Can you report self-pay after insurance by payer classification? What are the revenues by payer classification? All this information can be very helpful in evaluating where to improve processes and reduce bad debt.


It appears the system is attempting to collect self-pay as early as possible. It has implemented point of service collections at all entry points and is tracking those payments. Results vary, but progress is being made. The system has a robust insurance verification tool and service estimator to provide the patient with self-pay expectations prior to service. The system has partnered with an early out vendor that receives accounts at 31 days after service for straight self-pay. For those with some coverage, the vendor sees the account 31 days after insurance payment is received and insurance balances are zero and/or moved to self-pay after insurance. Patients receive timely statements, some collection call attempts are made, and some large balance accounts are screened for Medicaid eligibility or charity-care status. It’s the policy of the system to send an initial detail type bill for outpatient accounts and a summary uniform bill for inpatient accounts. After three statements the patient receives a final demand notice. It is at this point that the patient financial services system produces a pre-bad-debt list.


When business as usual blunts opportunity

Typically, most revenue cycle operations have some type of pre-bad-debt report that has a list of accounts that if not paid within a set period (usually one to four weeks), accounts will automatically move from active accounts receivable to placement with a bad debt agency. It is the responsibility of staff to review and make one last attempt to collect these unpaid accounts before writing them off their active accounts receivable and placing them with an agency. In practice, it is my experience that most organizations do not actually review this list. They simply acknowledge that the final statement requesting payment has been made, the account sits unpaid for the required time, and then it is transferred to the collection agency.


As noted above, establishing a baseline to determine effectiveness of the early out vendors and others involved in the collection of accounts receivable is critical. One method is to take the total self-pay payments and divide that amount by the self-pay placements. This is a very simple and effective KPI, but it has one caveat to keep in mind: Most collection efforts get rolling as long as a month after an account is placed, but large placements made within the last 15 days will lower your collection percentage.


As it is, our health system with $650 million in annual bad debt is writing off almost 12% of total revenue. As a safety net hospital serving a large metropolitan area this may not be too unusual. Of that total, how much is being collected by bad-debt agencies? I suspect very little, but for now this is just an unknown number that should be baselined.


Comparing payments to placements (less provider request for return with no action) brings us to another measurement: How much is being written-off to charity/financial assistance? In the case of this large system, approximately 4.3% of gross revenue. It appears from these numbers that bad debt is way too high and charity is way too low for this type of organization.


Two actions to consider

Take a more aggressive approach to identify potential charity. How much of the bad debt is made up of account balances greater than $5,000? Segment the balances to identify large balance accounts. Asking a patient to pay $100 is much easier to collect than asking for a payment of $100,000. The large balance should be worked more aggressively for Medicaid or charity. Although allocating more to charity does not increase cash, but it more accurately depicts how you are providing healthcare to the needy. By contrast, high bad debt represents a failure of your revenue cycle operation to collect receivables that could help deliver better care.


Another solution is to take on a vendor to work accounts and make a final collection effort for 15 to 30 days before assigning the account to bad debt. The vendor would need to be able to employ the latest technology. Using text, email and Interactive Voice Response (IVR) to reach 50% to 80% of this receivable will most certainly generate additional cash and reduce bad debt. The IVR should not be the standard “Press 1” for this or “Press 2” approach. Many patients do not respond well to automated systems like this. But what if this system could act like a real collector and have a conversation-like telephone call and response that would ask for payment and confirm the patient’s intentions to pay or not to pay? What if it accepted the patient’s response as is without making a tense situation worse?


This should be the goal of every revenue cycle operation – collecting self-pay receivables and improving customer service/satisfaction at the same time.

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