This article originally available on a podcast; click here to listen to the podcast
This is a follow-up podcast to one of the discussions we had around the net collection rate.
Diving Into the Numbers
Apache Health was recently in the process of evaluating the capabilities of a medical billing company, or you might call it an offshore business process outsourcing firm (BPO). As part of this evaluation they provided us with some information including a spreadsheet that had KPIs in it. As we have discussed in various other articles, we really like to dig into the data, which is the best way to evaluate the capability of a medical billing company. So down the data hole we went.
We went carefully walked though the spreadsheet they had provided and one of questions we had was how they were calculating the “Net Collections” rate, since it didn’t make any sense (we could see the calculations behind it in the Excel formulas).
That spreadsheet included charges, payments, refunds, and the calculation of “Net Payments” associated with those transactions. Then it had a series of write-off categories like insurance adjustments, write-off adjustments, bad debt, and so on, for a “Total Adjustments” calculation. There was a “Net Collections” calculation that seemed very questionable when we looked at the way it was calculated.
The “Net Collection” calculation was essentially a fudged number.
It would automatically default to 100% all of the time, for every single period. They had essentially removed the writeoffs field in the calculation of the denominator, so that it appeared as though every writeoff SHOULD have been written off and was not actually a loss. This made absolutely no sense at all. Not only is that not true, but there’s no purpose to having that type of a net collection calculation. Worse, we couldn’t tell if this was just incompetence or something worse.
We tried talking to them about the fact that their “Net Collection” calculation was essentially a made-up number. When we brought that up, they questioned what we were saying. I clarified, “Well, if you subtract out adjustments and write-offs from the denominator, then, of course, it’s always going to be 100% because you’re saying what you got collected is what you should have gotten collected no matter what. Therefore, it’ll always be 100%.” They disagreed. There was no substantive basis for their disagreement, just a lot of obfuscating words that was difficult to follow.
Write-offs Must Occur
I persisted in trying to get to the bottom of this weird analysis problem. I continued, “If there’s a write-off, for example some claim doesn’t get paid, and you write it off because there’s a problem with the diagnosis or the payer policy, or you don’t have the same demographics, whatever it might be, please confirm for me, does that go in this line where you have ‘Write-offs’?” Their response was one of the most astonishing things I had ever heard in healthcare revenue cycle management – “Well, there aren’t any write-offs.” I was floored, “What? What do you mean there are no write-offs?” They suggested that everything gets collected. Everything.
(Please listen to the podcast if you want to hear the detail of how many times we tried to get to the bottom of this and all the questions we had. It was exhausting, but too long to put in print.)
After stating that we must take it as fact that there are claims that cannot be paid for a number of reasons, I changed tactics a bit hoping to make some progress, “So you’re going to keep the claim on the books forever…for years, trying to get it paid unsuccessfully. Your AR is just going to balloon.” They said, “No, no, no! We’ll get it paid.”
This had to be one of the more frustrating conversations I have had in my career.
Finally relenting a bit they said, “If these writeoffs existed in theory, then yes, they would go into that write-off field,” which was “Write-off Adjustments”. I then pointed out that the way they were calculation “Net Collections” where writeoffs were taken out of the denominator as if they weren’t supposed to have gotten paid, would generate 100% net collection rate all the time.
They didn’t get the concept of gaming their system or that there was some problem with that. That became frustrating. We kind of went in circles. I said, “Look, we know analytics. We know billing because we ran a billing company. You really can’t pull the wool over our eyes on this.” We asked for actual data.
Actual live data was populated into the spreadsheet and sent to us, which we reviewed.
It turns out their analysis was much worse than we had originally thought.
While the sample blank template was concerning to us in the way it calculated certain elements, what we found when they provided the spreadsheet with actual live data turned out much worse than we initially thought. Not only are they gaming the “Net Collection” calculation, but they were completely screwing up the accounts receivable calculation or possibly worse.
Basic accounting principles (and things like GAAP) dictate that whatever unresolved claims you have in a period get added to your outstanding accounts receivable.
Let’s say hypothetically at the end of February, there is a total AR balance of $10 million. In the next period March, there is a calculation to determine outstanding AR at the end of that period, which includes starting with the last AR, adding charges, subtracting payments, subtracting adjustments, and subtracting write-offs (some systems processes have other factors, but this is for simplicity). This calculation nets your new AR balance at the end of the next period March.
Starting AR + Charges – Payments – Adjustments – Writeoffs = Ending AR
There are nuances, but that’s the simple version of it. In other words, whatever didn’t get resolved in a particular period gets added to the AR balance.
In their spreadsheet, that was not what was happening. AR, despite not having any writeoffs and not having all the claims resolved in a particular period, was not growing. It was roughly static. But worse, they weren’t even consistent. It is not like AR stayed the same either. The AR varied month to month, but had no logic. The numbers didn’t tie out.
The unresolved dollars from January didn’t get added to the balance such that you could calculate and reverse engineer and see that “Total AR” increased from January to February because it added what was unadjudicated in that period. That didn’t happen. The above example, if it had been legitimate, would have had Total AR (C18) = starting AR (B18) + charges (B4) – net payments (C8) – total adjustments (C12). This should be $97,332.44, but this sheets shows $79,982.04. Not only is not accurate, but it is showing a decrease in AR when it actually increased.
When we pointed out that their AR wasn’t adding up the unresolved, they said, “No.” They gave us some excuses, and they said some words that didn’t even make sense.
Net Collection – Hard to Believe Could be Even Worse
Frustrated, we moved onto Net Collections with live data. When asked, “What’s your definition of ‘Net Collection’ rate?” They again said something that made no sense. After literally repeating back their words, I was left saying, “I don’t know what that means.”
Although we had identified that their net collection rate calculation was flawed with the blank template spreadsheet, this live sheet didn’t show 100%. It showed 67%. The unresolved claims in that period were subtracted from the numerator effectively in that calculation. Instead of showing 100%, it showed 67%.
If a claim isn’t resolved and it’s still pending – let’s say you submitted a claim yesterday – if it’s not paid by today, that should not count as a zero in your Net Collections. It is just unresolved. Only resolved or fully adjudicated claims should count in the net collection calculation.
Worse than that, they spreadsheet of “KPIs” showed that sometimes the net collection rate would be more than 100%. You can’t collect more than you’re supposed to collect unless you get duplicate payment that that needs to be returned. That wasn’t the case here anyways.
Try to follow this craziness – If they didn’t write off something in January that was unadjudicated and wrote it off in February, that would count in favor of February’s net collection rate. Remember now that their calculation removed writeoffs from the denominator. Since not doing writeoffs drops the net collection rate in this weird world of their analysis, writeoffs would conversely artificially boost their net collection rate. This means if they waited six months to do any write-offs and then they did a ton of write-offs all at the same time, suddenly have a net collection rate of 120% or 130%, or 150%. That’s nonsense.
AR staying the same when something isn’t adjudicated, that’s basically fraud. If you’re not accounting for and showing the accounts receivable increasing over time, when the claims are not fully adjudicated, and you’re trying to misrepresent that your AR is actually growing, that seems fraudulent.
Was the intent of this medical billing company to commit fraud? Were they trying to pull the wool over someone’s eyes so they could get the business using fabricated numbers and misrepresent to the client ongoing that everything was “great” while things were actually falling apart? Hard to know. Sometimes negligence or incompetence looks like fraud.
At root fraud from a technical standpoint requires intent, which is difficult to know or prove. We don’t know for sure what their intent is. But does it really matter her? It could be that you’re just completely incompetent, but the problem is, this is the core business – accounts receivable management and collection of payment. If you can’t figure out how to calculate an AR balance, you’ve got a monster problem. These characters were dangerous.
If we were evaluating this vendor and had just scored them based on the sales presentation, they would have done quite well. They said all the right things. They clearly knew billing. They could provide references that were positive.
It wasn’t until we asked for spreadsheets and really dove into the their analysis and requested and received live data that it became obvious they were a complete disaster.
The net is that if you are evaluating a service vendor, or even an employee who is going to be managing the RCM department of a practice or facility, it is critical to dive into data. Strip away any excuses for why they can’t show you real data otherwise you may find yourself in a real mess.
We have given you so much detail in the questions we asked the problems we saw, in order to help illustrate the depth of analysis that needs to be performed if you are to ensure that your revenue cycle management is successful, whether billed inhouse or outsourced.