The subject of a recent podcast was why hard to collect claims are systematically company not worked. This article is a follow-up with another issue that correlates closely.

Flat Rate Pricing

Most medical billing services have flat-rate pricing. In other words, they charge a flat percentage of what they collect, for example, 4% or 8%. What is little understood or even less discussed is that this creates a huge perverse incentive in performance.  Most billing companies for decades have told providers that they are more closely aligned. With the provider’s performance than inhouse billing because they “don’t get paid unless you get paid”, whereas a billing team collects a paycheck no matter what.  As with many things, there is truth in this and it is also highly misleading.

We recognized the inherent perverse incentive problem. In flat rate pricing 15 years ago when we first got into the medical billing business. Flat-rate pricing from a revenue cycle management company encourages the behavior of just going after the low-hanging fruit.  Read on to find out how.

A Flawed Pricing Model

In order to illustrate the problem, we can think about it on a microeconomic example level. Let’s say for example that $100 is the expected reimbursement for a claim. And a medical billing company is charging 5% just for simple calculation purposes. The company gets $5 if they collect on that claim. The health insurer simply reimburses after the first submission. Whether the billing company is just doing manual data entry or there’s an interface built. It probably cost them less than 5 bucks to enter, submit, and post-payment for that claim. It many times or do an appeal or even several appeals. They could easily spend $25-50 or more in order to collect $100.

So, it costs them $50 to collect that $100 and receive $5 in marginal reimbursement for that individual claim WHEN THEY ARE SUCCESSFUL. Financially, It just doesn’t make sense to spend $50 to go after the hard to collect claims to receive $5.  Even worse

Financial Incentives

There is a strong financial incentive to not go after the hard-to-collect claims. They might for example only appeal surgeries and not clinic visits, or only go after small-dollar claims when they can be batched en masse.  Even unsophisticated RCM companies may think, “Well, okay! That’s too much work and we’re not getting paid enough to do that.” Or an individual medical biller working for the company might be incentivized to act in such a way (unconsciously) to pursue the most output. for the least amount of time and therefore make the decision not to pursue hard claims. 

Your gut has probably always told you why some only go after “the low hanging fruit”, but perhaps the detailed quantification for the perverse incentive was not presented.  And this hasn’t changed in decades because this pricing model is still the same, and the model is fundamentally flawed.

A New Pricing Model?

We attempted many, many years ago in the mid-2000s to develop a completely novel pricing model. That eliminated this issue of the perverse incentive. That was not doing all the extra work.  We offer the market a tiered pricing system based on the difficulty of collection and charge. An introductory rate that was something like 5% depending on the specialty. And we charged a higher rate, approximately 20%-25% of collections. On claims that were harder to collect, for example, if we had to do appeals.

The problems we encountered with this novel medical billing pricing were many. One of them was how to identify “harder to collect” claims? Is it when you have to follow up on it, or do you have to do a new appeal? What about something else like fixing payer registration or provider enrollment?  Suppose you have to submit documentation to a payer in order to get 500 claims paid all at one time related to an EDI issue; should those all count in the same higher tier?

The largest problem we encountered was that novelty is not always rewarded in healthcare in the United States.  Many (although not all) providers are fearful of change and not quick to adopt new methodologies or technologies (look at EMR which took decades to reach the same penetration as secretarial work).

Swapping One Perverse Incentive for Another

A problem we had not anticipated was that some people correctly identified (doctors are smart, aren’t they?) that we had inadvertently created a new perverse incentive in eliminating another. The financial incentive now for the medical billing service is to have more “hard to collect” claims or problematic claims, which increases your revenue.  This means more delays, more denials. And not getting paid on a first pass in order to trigger that higher percentage.

The reality is that if the pricing is matched to cost, that is that the higher tier pricing reflects the additional cost of dealing with difficult claims), then there is not a perverse incentive to delay reimbursement.  Additionally, any problems mean that less claims likely would be paid, yielding a lower financial return to the billing company. 

Avoiding Perverse Incentives

To deal with the concern of a new perverse incentive, you could have and would need great analytics in order to demonstrate the additional staffing and work provided in doing all those resubmissions and appeals. At that point in time (mid-2000s), we were just entering the business and we did not yet have great analytics, although we had ultimately developed those.

You would also need a willing and capable market to understand a real deep dive into those analytics. And the reality is the market wasn’t ready for this, and I’m still not even sure it’s prepared for it now.

A Workaround

Instead of introducing new medical billing pricing, we addressed the issue of this perverse incentive. By adding additional resources in the back-end.  We staffed collectors more heavily on appeals and added management resources that would do analysis. To identify and solve large batches of claims at one time. Instead of charge 5% like our competitors, we essentially explained that you would pay 6% and receive additional staff to go after the hard to collect claims. And we were successful in doing that, both from a pricing standpoint and the financial results. We did attract more clients, and Cobalt Health focused on getting results, not profitability to ultimately great success.

We were unprofitable for many years because we did staff heavily and focused on getting results, not profitability. Profits then eventually came later in the business, in the later years after many, many years of being unprofitable and just cranking away at trying to deliver results in order to establish a reputation. So contact us if you are a medical billing company want to know about the microeconomics of the difference in 1% incremental pricing.

Are You Getting Value?

The real challenge that providers have when a medical billing service makes the type of a claim as we did 10-15 years ago is verifying if you are getting additional results for the additional rate, or just padded the pockets of the billing company. The key question is whether they are charging more in exchange for actually delivering higher staffing levels. Higher staffing levels implies you get better financial results. And the question is, “Are they getting financial results for the additional cost?” To be really blunt, you don’t even know if they have additional staffing.

It is possible to cut through some of that uncertainty. There are a couple of different ways. One is just to look at a staffing level, and you can get raw data from them on this. There are reports and data that allows you to determine how many people they have working on your account. The name attached to each claim being worked indicates a person or a seat license on the software, and records in their system when the appeal was done, or claim status was checked, and so on.

Getting the Data

All systems must log and collect this information, especially since you have HIPAA requirements to make it accessible, so it should be possible to generate, although some systems are much better than others. If you get that information out, then you can see, “Do they have higher staffing levels than other organizations working. On your account individually?” A more sophisticated way to do this is even to quantify the number of encounters worked. Appealed, paid, etc. to look at productivity and output rather than just bodies.

However we are still assuming that output or bodies is a legitimate indicator of more financial success – collections. There may be some correlation to that obviously, but it does not mean that that they are more successful. Some billing companies may generate better results with less people or less touches of the claim. because they are better trained or have better systems.  We’ve seen many people slog away and touch a claim many times without actually getting the payment. If the billers are not productive in actually generating a lot of dollar revenue per unit time or per claim touch, then it doesn’t mean anything.

Not all medical billing services are created equal.  We see an enormous range of financial results between them.  So please do not take this article to mean that all billing companies operate the same way or that none of them go after the difficult claims.  It means you should do your homework, and that does NOT include checking references.  (See other articles on that).

Quantifying Financial Performance

The ultimate goal for any provider is to determine, “Is my medical billing more financially successful than other billing companies?” and secondarily, “financial performance relative to the price that they are charging?” There are ways to quantify this and Apache offers this service or you can do it yourself. We’ve talked about some ways to do this in some of the podcasts and blog articles; look for “quantifying financial performance”.

It is important to note that this is not unique to billing companies. You can also use this methodology to quantify the in-house billing performance, benchmark, or track whether it is improving over time.

Feel free to get in touch with us, and we’re happy to explain how that works or even give you some tips on how to perform that analysis.


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