Is Your Medical Billing Service a Good Investment?
There is a bit of ancient wisdom that applies to many domains of business, and of life:
“80% of effects come from 20% of causes” – Pareto’s principle, (aka the 80/20 rule)
You can see this principle at work in practically any business. It might be 20% of your products or services driving 80% of profits, or 20% of customers driving 80% of sales. Or, perhaps, it’s 20% of patients accounting for 80% of your time.
The moral is that your success is driven by how you address that 20%, because that is where the leverage is. That is where your efforts are magnified, and outcomes are more impactful.
In the Revenue Cycle Management (RCM) industry, this principle holds. Ask yourself, with respect to collecting on your bills, where do most of the problems occur? Is it the bulk of patients/providers/insurers…or a relatively few difficult ones?
So if (or when) you outsource your billing, are your fees addressing the 80% or the 20%? Are you just paying someone to collect from the 80% who would have paid relatively easily anyway? And how would you know?
It’s Not Only About Price.
First, the good news: you probably pay a lot less for billing services then you were paying 15 years ago. And if you weren’t practicing back then, just ask someone who was. There is a simple reason for it – outsourcing. Like a vast swath of American businesses, the Revenue Cycle Management (RCM) industry took advantage of the rising tide of an educated, English-speaking middle class in places like India, who work for a fraction of what comparable US-based workers would be paid.
And now the bad news: this outsourcing movement was the beginning of an era where price was the key differentiator between these service providers. And at the outset, this was a rational way to distinguish between them, because the ones who jumped on the outsourcing bandwagon early had an authentically better value proposition given their lower labor costs.
But those days are over. Outsourcing/offshoring is now the norm and the playing field for costs is leveled. So it’s time to look beyond price, because it’s no longer a meaningful metric.
According to many professionals in the field, choosing a service based on price is more likely than ever to cost you money rather than save you money.
So if it’s not price-driven, what should be the criterion? The answer is as simple as the math: return on investment (ROI). What differentiates one billing service from another is not how much you pay, but how they contribute to your bottom line. Billing comes with a cost, whether you do it in-house or hire a billing company. And it also has an impact on your revenue. It makes no sense to ignore one of these two criteria. The least costly option is almost never the best one. The best option is the one with the best margin between what you pay and what you recover in revenues..
There are two keys to evaluating ROI (how much you get back) effectively
- Are you collecting from those who would not have paid otherwise (aka the “20%”)?
- Do you have a way to measure the above?
The ROI-based Approach
First, let’s take a look at the “20%”, and how that affects your collections in an outsized way. If you were going to see significant improvements in your collections, where would those improvements come from? Would it come from doing a more efficient job with charge entry and payment postings? Likely no…there is much more leverage (and headroom for increasing your revenue) in addressing the minority of claims that constitute the majority of your lost revenues.
Recovering that revenue requires doing the harder, higher-leverage stuff, such as:
Maintaining staff and skill sets to address a broader base of needs, such as:
- Up-front patient eligibility checks
- Monitoring and updating payer rules
- Thorough follow-up on individual claims, working claims, submitting appeals, etc.
- Systematic analysis to find problem payers or small problems that apply to many claims
Developing systems and infrastructure, such as:
- Software that reconciles charges
- Analytics tools to help identify problems that need attention
- Appeals software that helps collectors win more claims
- Identifying payer rules to predict and prevent problems
So your opportunity to increase your revenues comes from these higher-value services. But market forces (aka the price wars) have effectively taken this off the table for many billing service companies who compete on price alone. They don’t win by increasing your collections and revenue. They win by spending less time and money on what you would be collecting anyway.
But what if your billing company had the necessary skills and resources to focus on the high-value services? Such a company might (justifiably) demand higher fees. Would it be worth the additional cost?
Some simple math can illustrate how this might work. Let’s assume you have a $1mm practice, and you typically collect 85% of what you are contractually owed. Let’s also assume you pay 4% to your medical billing service, or $34,000. You have $150k on the table that you are not collecting.
- Your fees: $34,000
- Uncollected revenue: $150,000
Now let’s imagine you are considering a different company that charges 6%. That would increase your billing company fee expenses by $17,000! What would it take to get a return on that $17k investment? A fairly modest increase in collections, it turns out. An additional 2% (increase from 85% to 87%) would be an additional 2% of $1mm, or $20k.
- Your “investment” in higher fees: $17,000
- Additional revenue collected @2% increase in collections: $20,000
But if you consider the fact that the new billing company’s “revenue collecting power” is 50% higher, it’s reasonable to believe that your upside could be much higher as well. What if they increased your billings to 90%, or 95%?
- 5% increase (to 90% net) = $50,000 in additional revenue collected
- 10% increase (to 95% net) = $100,000 in additional revenue collected
To achieve such returns, a smart company would follow the 80/20 rule and deploy the resources to target the problem payers via the high-value (and high return) services listed above. They would win by increasing their revenue and gross margin. You win via a better ROI.
So paying for higher service levels has the potential be a great investment! But how would you know if it was paying off?
You Can’t Manage What You Can’t Measure
Measuring ROI requires that you know whether your billing company is attacking the problem payers, where the upside is, or simply following the path of least resistance. In many cases, you have no way of knowing.
The solution, ultimately, lies in the transparency of your billing company’s practices and its data. You need to know where and how your fees are being applied, and what effect it has on collections. Unfortunately, in the “race to the bottom” on price, few billing companies will make this sort of information available to you.
But there are steps you can take in the process of choosing a billing company that will greatly increase your chances of getting the visibility you need, and thus a positive ROI. When employed successfully, a few well-placed screening tactics will allow you to make an informed decision, and avoid the potential trap of simply making a price comparison.
- Evaluate their knowledge/experience within your specialty: find out how they handle particular problems you have encountered. Ask for examples. If they talk about a particular solution they employed, ask to talk to the corresponding client.
- Ask About Reports: find out the breadth and depth of reporting available to you. Ask for samples of live reports from actual customers. Ask yourself if the available reports will enable you to measure your ROI. Will you be able to quantify the increase of collections from the problem payers?
- Check Financial Results: compare the performance of the proposed billing company relative to your inhouse billing and determine what if any increase in collections they can generate. Quantify the potential increase.
It’s Your Money
For many medical practices, the choice of a bad billing company turn out to be a bad investment. Companies that count on large volume and low prices are typically upside-down when it comes to the 80/20 rule. Low prices and thin margins weigh against the high value services that are likely to recover lost revenue for you.
Is your billing company providing a return on your investment? As the saying goes, “don’t be penny-wise and pound foolish.” Find a billing company that is focused on your ROI.
About Apache Health
Apache Health is a revenue cycle management (RCM) analytics, benchmarking, and auditing company. The founders of Apache formerly ran a large RCM company that was acquired by a private equity group in a rollup. Apache’s predictive analytics will benchmark billing performance and project exactly how much more revenue you should earn from your existing volume of patients. Using many factors and a blend of artificial intelligence and specialty specific benchmarks, the model projects whether changing the billing process would improve collections for your particular mix of procedures and payers. Apache Health can help you evaluate whether to outsource the billing, determine which billing company to select to maximize performance, or track in-house billing performance improvement over time. For more information contact: