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One of the things that became obvious while running a billing company is that to go harder to collect claims successfully, you need to have economies of scale. Economies of scale mean 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.
Why hire analysts for better business functions?
Management resources, basically doing analysis and problem-solving, are required. To solve many billing problems like identifying issues with payers or registration issues or enrollments, IT issues, 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. For example, it may take 10 hours to solve a particular problem from pulling data, analyzing, identifying a problem, digging in deeply to get more information on it, charting a solution, and then tracking and following through change implementation. Let’s say it is 10 hours to solve 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, whatever it is, it affects a block of claims, so it affects 40 shares. If you are more extensive, it affects 4,000 claims with that particular payer. It is what I mean by economies of scale. If it is a fixed amount of effort to fix a problem and usually pretty close to that, enroll a provider, or select some EDI issue that solves 40 claims. It solves 4,000 shares as it will only make financial sense if you have better economies of scale because you have way more claims going through because then you get way more revenue as a result of solving that individual claim, 10-100 times as much income.
How to allocate management resources?
We also see it in the Pareto effect, which people often call the 80-20 rule—going and doing analysis to solve big problems, great. Maybe, everybody can do that. To get down to the second or third tier set of issues, perhaps only it affects 1% of claims or a fraction of a percent of shares.
- If something affects a half percent of ownership, and that’s 150 claims, maybe, you will never even get around to solving something that solves 50 or 75 or whatever number of requests. If that half a percent represents 6,000 claims, well, yeah, now you suddenly got to the half-percent problem because solving something that represents 6,000 claims is worth it financially to do that.
- 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. Bringing millions and millions of dollars for a more prominent provider is more feasible. It is the reason why I think, financially, it is easier to have higher performance with a more prominent provider. Also, It is because there are economies of scale when it comes to revenue cycle management specifically. It just does not work out as well for tiny numbers of clients.
- Fifteen years ago, we realized this, and we took on small clients. Then eventually, we started taking on larger clients and focusing on larger clients. 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 identify how to solve problems and then put the resources.
- It is one reason why, in theory, at least, and it should be in practice. It is just that it depends on the billing company. Similarly, It should be that a billing company can have more significant economies of scale. In theory, all things being equal, should provide better financial results. Then in-house billing because they are billing for a much larger number of providers and doing a much larger volume of claims. That is assuming that a billing company is more significant than an in-house provider group. It also makes some other assumptions related to incentive structures and other things that may count against the billing company.
- I am saying that all other things being equal; everybody has the same incentives, they get compensated the same way, everybody wants to solve things as much as everybody else. If you are more extensive and a billing company can aggregate many providers, they should, in theory. Be able to provide better financial performance than one of the individual billing providers billing for themselves. Again, that is not always the case. In theory, that should be the case. The point is more here; just economies of scale matter.
- Suppose you can analyze across all of those clients. Let us say they specialize in cardiology, orthopedics, and they have got 50 different orthopedic clients. If you solve it once, it fixes it for everybody rather than solving it 50 different times with 50 other resources. Instead of solving 100 claims for 50 various providers, you solve 5,000 shares all at once. It is part of the reason why there is so much pressure on rolling up and consolidating providers. It is because there are economies of scale.
- Hospitals, generally, are not good at billing with all respect to them. They often put together orthopedics, cardiology, and many other specialties. 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. The hospital has 50 other ways. Some of them are cardio-, some ortho-, some PT, everything under the sun. They do not get the same economies of scale. Some of that is lost.
We generally suggest that having some scale matters, even if that means banding together to do it. Maybe, a group of providers is all throwing together even if they have separate legal structures. They are not consolidating. They are separate entities. Perhaps, they pull 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. By pooling and working together just for those things.” That is a great way to do it if you cannot somehow consolidate or not part of a larger entity or do not have a top-rate billing company doing this for you.
That is our subject on economies of scale and why they are so essential. To go after harder to collect claims. The basics are doing the analysis are very labor-intensive. 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.