In this issue of Insights, we would like to explore a real life situation that is occurring in a significant number of hospitals throughout the country. Outpatient daily statistical reports (Management's "dashboard") indicate that volumes in various outpatient departments are over the budgeted statistical volumes and gross charge amounts. However, when the month-end close is completed, the Finance department reports that the outpatient net revenue is under budget and non-financial Management question the results and the credibility of the Finance department. This article focuses on a hospital that experienced this situation and shares with you the actions that were taken by the hospital, with the assistance of IMA Consulting, to better understand outpatient revenue metrics for the purpose of developing a creative solution in monitoring outpatient volumes, net revenue, and related revenue cycle activity.
 
Background
IMA Consulting received a call from a hospital client who was experiencing the dilemma described above. After meeting with the client and discussing the possible causes, the following observations were made:

• The payer mix had not changed significantly; accordingly this would not be a reason for variance.
• The Emergency Room and Cancer Center visits may include multiple radiology and laboratory charges that are generally paid as part of a "bundled" payment for each emergency room and cancer center visit.
• Reimbursable charges are often bundled under the Medicare Program APC reimbursement.
  Based on these and other observations, a decision was made to develop an accurate and reliable financial tool to estimate net outpatient revenue on a daily and month-to-date basis and compare actual results to predetermined budgeted amounts.

Challenges 
What Metrics to Monitor
 
The major challenge the hospital faced was what "metrics" to utilize in order to estimate and monitor net outpatient revenue. The following three "metrics" were considered:
Visits/Procedures - This statistic had been used historically by the hospital, but presented valuation challenges as the data was reported from individual department logs that contained errors; didn't always correlate with the budget; and didn't account for delays in charge processing that impact outpatient revenue reporting.

Patient Registrations - This statistic presented challenges in determining net revenue since the hospital only knew which department had registered the patient, but not the scope of services rendered. In addition, the hospital faced count challenges due to inaccurate daily registration information. These inaccuracies were caused by delays in processing, zero charge registrations, and/or no-show patients.
Gross Charges - Initially, this statistic seemed to be limiting, especially when viewed on a departmental basis. Outpatient payments are typically based on a patient's "episode of care" and include charges for various departmental services (bundled payments). In order to utilize gross charges, a hierarchy needed to be developed by "episode of care". Once the hierarchy was developed, patient visits/registrations and the related gross charges were grouped into an "episode of care" consistent with payment methodologies.
After much consideration and discussion it was determined that monitoring gross charges utilizing the "episode of care" methodology would not only allow the hospital to reasonably predict estimated outpatient net revenue, but would also create two other unintended significant benefits.
 
Methodology
 
The "Episode of Care" Hierarchy
 
The first step was to settle on a grouping of charge hierarchy that all stakeholders would agree on. For example, an emergency room visit was defined as an "episode of care" and included all gross charges associated with that particular visit, including any and all "ancillary charges", (i.e. X-ray, CT Scan, MRI, Laboratory, etc.). The hospital defined 15 specific "episodes of care" and an "All Other" category. The "All Other" category represented approximately 12% of budgeted outpatient gross charges and approximately 14% of net outpatient revenue. These groupings were reviewed and approved by stakeholders including the Business Office, Revenue Cycle, Information Technology Group, and Operations Senior Management.
 
Realization Percentages by "Episode of Care"
 
The cash realization percentages by outpatient "episode of care" were developed from historically available data on an account by account basis. The computed cash realization percentages indicated only a +/- 2 percent variance against actual outpatient net revenue recorded in the financial statements. The results of this analysis were utilized to obtain the realization percentages currently being used for estimating daily and month-to-date net outpatient revenue.
 
Allocating Net Outpatient Budgeted Revenue on a Daily Basis
 
In order to estimate daily gross charges, a review was conducted utilizing six months of posted charges by day of the week by "episode of care". These charges were summarized by the seven days of the week. Interestingly enough, total posted gross charges were relatively equal from Monday to Friday; however, certain "episodes of care" experienced over 50% of their posted charges on Monday and Tuesday. These percentages were then applied to the budgeted gross charges by "episode of care" for various budget months.
 
Estimating Daily Actual Gross Charges and Net Outpatient Revenue
 
In order to obtain daily posted gross charges, the hospital's information technology department executes a daily report that is automatically posted as an Excel file to the Finance department's designated folder. Several pivot tables are prepared and the current estimated realization percentages are then applied and in less than 10 minutes a management report is ready for distribution.
 
Unexpected Benefits
 
By linking this predictive tool to daily gross charge processing, the hospital experienced the unintended benefit of enhanced monitoring of the daily outpatient charge submission process. After several months of outpatient predictive indicator report utilization and one-on-one interactions with individual departments, the hospital decided that the organization should institute a monthly Outpatient Revenue Cycle meeting. This meeting included all Outpatient Service Departments, Business Office, and Information Technology personnel. These individuals meet and review actual to budget performance looking to understand volume gaps and revenue cycle opportunities. By meeting as a group, the hospital is able to leverage ideas and learning across the organization for maximum benefit.
 
The second, equally important, unexpected benefit was derived from the Decision Support data that was created to support the estimated realization percentages. As Management began to look at payment data over time, patterns were seen regarding collection percentages for certain services. Management was able to drill down in the Decision Support system to determine what payers and accounts might be at issue and determine corrective actions. Operations management interacts effectively with the Business Office on issues such as insurer's noncompliance with contractual payment terms and payment denials. Operations personnel also have a greater appreciation for the differences in payment terms for various insurer's and the need to communicate these differences to physicians and others focused on volume growth initiatives. 

Insights
 
The hospital believes this tool has provided numerous benefits, including but not limited to the following:
A relatively accurate estimate of net outpatient revenue on a daily and month-to-date basis, based on posted gross charges compared to budget.
Understanding and focus on "episodes of care" profitability.
The cash realization module identifies gaps in cash collections.
The daily charge posting module identifies gaps in charge processing. The various modules in this tool provide an excellent tool to identify potential financial, as well as, operational issues that may be impacting the hospital's outpatient net revenue.
This tool is distributed to Senior Management, as well as, all departmental administrators responsible for outpatient services.
 
Summary
This tool has been utilized for over six months and has yielded excellent results including recognition by the System COO and CFO. Consideration is being given to expanding this tool to other hospitals within the system. It is important to point out that this tool is not being utilized to record net outpatient revenue on a monthly basis but rather as a supplement to the ongoing financial closing process. Our client believes that this tool has increased the awareness of departmental administrators of the importance of timely charge entry and the resulting impact on the accuracy of the monthly financial statements from a net outpatient revenue prospective.
 
We are pleased to have had the opportunity to provide this information to you. If you have any questions or need assistance with developing a similar model/tool or wish to discuss this article further, please contact John Skurka, CPA, Senior Consulting Manager, at (484) 467-4320 or me at (484) 354-7595.

Yours very truly, 

Robert J. De Luca
Partner
IMA Consulting