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Economies of Scale

One of the things that became obvious while running a billing company is that to go after harder to collect claims successfully, you need to have economies of scale. The term “economies of scale” means that you have to be large enough to allocate some resources to do things. For example, you can have much more significant scale economies if you have 200 employees rather than 20 employees because you are processing ten times as many claims. Therefore, you can afford to have some additional resources that you might not be able to afford to have in a company with 20 employees, for example.

Management resources, basically doing denials analysis and problem-solving, are required to solve many billing problems like identifying issues with payers, registration, enrollments, or IT or EDI issues. The more managers and the more layers of managing you have in a company, the more potential you will be able to afford to have analysts or in-house managers adept at doing analysis.

There is, of course, a problem with small scale. For example, it may take 10 hours to solve a particular problem including pulling data, analyzing the data, identifying a problem, digging in deeply to get more information on it, charting a solution, implementing some change, and then tracking and following through on that implementation. Let’s say it is 10 hours to solve just 40 claims – that is not very financially efficient.

Often we find that if there is a particular problem with a payer or a type of procedure that affects a block of claims, so it it might affects 40 claims for a small organization. If you are much larger, that same problem might affect 4,000 claims with that particular payer. This is what I mean by economies of scale and its impact. If it is a relatively fixed amount of effort to analyze and solve a problem (and while not completely so, usually pretty close to that and very non-linear), whether it be enrolling a provider, or curing some EDI issue. If it solves 4,000 claims instead of 40, then it can only make financial sense to do this type of work if you have better economies of scale because then you get way more revenue as a result of solving that individual problem, perhaps 10-100 times as much income.  You suddenly swing from a negative ROI to a massive ROI in doing that management function.

Why Solo Providers Are Under Pressure

We also see it in the Pareto effect (which people often call the 80-20 rule).  While it may make financial sense to solve the top problems in a small provider, it may not make sense to spend all the effort to get down to the second or third tier set of issues, which perhaps only affects 1% of claims or even a fraction of a percent of claims. 

If something affects a half percent of collections annually, and that’s just 150 claims, then you will like never even get around to solving something of that magnitude. If that half a percent represents 6,000 claims, then you suddenly can justify going after the half-percent problem because solving something that represents 6,000 claims is certainly a good investment. It is one reason why billing for a solo provider, whether it is an in-house billing person or even a billing company, is not always very cost-effective. Billing millions and millions of dollars for a larger provider is more successful.  Never mind the other economies of scale of having a larger practice like mid-levels and selling other services.

Fifteen years ago while running a billing company we realized this after we took on small clients early in our company’s life. Eventually we started taking on larger and larger clients and ultimately setting minimums so that we only took on larger clients. IT wasn’t even about profitability – we knew that the only way to provide excellent financial performance was to have some scale where we could allocate management resources, billing managers, and analysts to crunch numbers and identify how to solve problems for that client.

Medical Billing Companies

In theory it should be that a medical billing company can have more significant economies of scale and (again in theory with all other things being equal) should provide better financial results than a provider doing their own in-house billing because the billing company is billing for a much larger number of providers and doing a much larger volume of claims. This of course is assuming that a medical billing company is larger than an in-house provider medical billing department. It also makes some other assumptions related to incentive structures and other things that may count against the billing company.

Suppose you can analyze across all of those clients that a medical billing company has. Let us say they specialize in cardiology or orthopedics, and they have got 50 different orthopedic clients. If you a single problem once, it fixes it for everybody rather than solving it 50 different times with 50 different management or analytics resources across 50 different providers. Instead of solving 100 claims for 50 different providers, you solve 5,000 claims all at once. It is part of the reason why there is so much pressure on rolling up and consolidating provider practices, because there are economies of scale.

Hospitals, generally, are not good at billing. They often put together orthopedics, cardiology, and many other specialties into one billing group. They do not get some of the economies of scale you might get otherwise. A single billing company that bills for 50 orthopedic practices has a different level of the economy of scale and benefits that a hospital would not have that bills for 50 groups where some of those are cardiology, some orthopaedic, some PT…basically everything under the sun. They do not get the same economies of scale and some of those benefits are lost.

To be clear, we are not advocating for medical billing companies.  We have no affiliation or financial agreement that would put us in their pocket.  There are many factors why a billing company might perform less well than an inhouse billing group.  For one, they might not have economies of scale.  A 20 employee medical billing company offers little to no benefit in software, management resources, analytics capabilities, etc. and most small billing companies do not specialize in a single specialty that would help in coding and payer policy knowledge relative to doing it inhouse.  More importantly, a provider that watches over their billing like a hawk (or has someone really dedicated inhouse that cares about the results) may have an advantage over a billing company that has some perverse pricing incentives to go after low hanging fruit (see our other article on perverse pricing incentives in medical billing).  But none of these factors impacts on the question of economies of scale, they still matter.  This an article about those, not billing companies.

Summary

We generally suggest that having some scale matters, even if that means banding together to do it. A group of small healthcare providers could all throw their weight together even if they have separate legal structures. They are not consolidating. They are still separate entities. Perhaps they pool some resources and say, “Hey, we are going to have some shared resources like we are going to have this manager and this analyst, this financial analyst, this data analyst. These people are going to do it for everybody. Therefore, we share resources and get some of these economies of scale while still remaining independent by pooling and working together just for those things.” That is a great way to do it if you cannot somehow consolidate or you’re not part of a larger entity or do not have one of the few great billing companies doing this for you.

Denials management is a perfect example of where economies of scale really matter.  If you want someone to go after harder to collect claims, then doing the analysis is very labor-intensive and it would help if you had it to solve large amounts of claims to dedicate those expensive and time-consuming resources. That is why economies of scale matter.

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