Hospitals Write Off 90% More Claim Denials, Costing up to $3.5M

Hospitals strengthened key revenue cycle components over the past two years, but claims denials represented a major threat to their financial health, the recent Revenue Cycle Survey from Advisory Board revealed.

Health systems and hospitals wrote off 90 percent more claim denials as uncollectable compared to six years ago, uncovered the survey of healthcare executives at 90 organizations and data from nearly 300 organizations.

For a hospital with a median of 350 beds, the increase in uncollectable claim denials would signify a $3.5 million loss over the past four years.

Hospitals and health systems can recoup financial losses by appealing claim denials. However recent trends show that successfully appealing a denial has become more complicated for hospitals.

The success rate for claim denial appeals for hospitals dropped from a median of 56 percent to 45 percent for private payers over the past two years. The median success rate for claim denials appeals also dropped from 51 percent to 41 percent for Medicaid.

Hospitals experienced more luck appealing denials from Medicare and Medicare Advantage. The rate of successful claim denial appeals for hospitals increased from 50 percent to 64 percent.

Successfully appealing claim denials may prove to be a lingering challenge for hospitals, the survey explained. As the industry shifts to value-based reimbursement, proving medical necessity is likely to surpass technical or demographic errors as the top reason for denials.

To successfully recoup reimbursement, hospitals will need to demonstrate that the care their providers delivered was necessary instead of simply correcting a demographic mistake.

“With denials volume increasing not just for commercial payers but especially for Medicare Advantage, health systems need strategies to address denials proactively,” explained James Green, National Partner of Consulting at Advisory Board. “The wide range of denials performance among health systems—spanning 3 percent of net patient revenue between high and low performers—amounts to a $10 million swing for a median 350-bed hospital.”

Hospitals and health systems should develop appeals strategies that emphasize improved clinical documentation and authorization processes, he added.

Additionally, the survey showed mixed results for three other critical hospital revenue cycle performance indicators: cash flow, patient collections, and cost to collect.

Hospitals and health systems saw cash flow significantly increase in the past decade. Median performance for net A/R days improved by 8 percent between 2015 and 2017, adding to the 21 percent improvement in the past decade.

However, researchers expressed concerns that financial gains may partially stem from write-offs and other factors that reduce A/R, but create other hospital revenue cycle challenges.

Patient collection improvement was also a mixed bag. The survey found that hospital bad debt declined as more individuals gained insurance coverage under the Affordable Care Act and Medicaid expansion in some states. Just 6.1 percent of provider visits involved uninsured patients in 2016, down from 6.9 percent in the previous year, the American Medical Association recently reported.

While hospitals and health systems saw bad debt decrease, unpaid patient financial responsibility increased under high-deductible health plans. The average annual premium for families covered by employer-sponsored health plans in 2017 was $18,764, up 12 percent since 2012 and 55 percent since 2007, the Kaiser Family Foundation recently found.

As patients are expected to cover more of the costs, collecting at the point-of-service is key, the Advisory Board stated.

While the median for point-of-service patient collections grew from 0.24 percent of net patient revenue to 0.80 percent over the past six years, hospitals are still missing an opportunity to collect patient financial responsibility.

Offering discounts to patients may help organizations boost point-of-service patient collections. Hospitals and health systems that reported higher than average point-of-service patient collections tended to use patient financial responsibility discounts for full upfront payments.

The discount strategy resulted in a 90 percent growth in point-of-service patient collections compared to hospitals and health systems that did not use discounts.

In terms of cost to collect, hospitals and health systems remained around 3 percent over the past four years. But this value was still significantly higher than the median cost to collect from six years ago.

With hospital margin trends softening in the last year, reducing the cost to collect is also becoming more important for hospital revenue cycles, the Advisory Board added.

The organization suggested that hospitals and health systems centralize key revenue cycle functions to continue to drive down costs. The survey indicated that organizations have done less to centralize hospital revenue cycle functions in the past year compared to 2008.

“While, for example, patient access is difficult to centralize, other functions present good opportunities, such as coding, billing, collections, denials, and payer contracting, especially given their high operational costs for these functions,” advised Christopher Kerns, Executive Director of Research at Advisory Board.

Vice Presidents should also shoulder hospital revenue cycle management oversight, especially as the role of Chief Financial Officer expands, Kerns recommended.