CEO SUMMARY: Many anatomic pathology groups are watching their revenue decline and margins shrink on the same or greater case volume. These trends make it imperative to have a deeper understanding of the operational and financial variables that contribute to stability in the group’s finances and pathologist compensation. One expert on the financial complexity of anatomic pathology operations provided insights into how these groups can analyze their coding, billing, and collections operations and improve expense management.
PART ONE OF A SERIES
IT’S BEEN SAID that if you don’t know what your business spends and what it generates in revenue, then those numbers are likely much worse than you think.
For Al Sirmon, co-founder of Pathology Practice Advisors (PPA) in Columbia, S.C., that warning is particularly significant for pathology groups. In over two decades as a practice consultant, he’s seen pathology groups that don’t have accurate numbers on their revenue and expenses. Consequently, they assume their finances are much rosier than the reality of their group’s situation.
Since co-founding this consultancy in 2016 with Chappy Manning, RN, CPC, CPMA, Sirmon has learned that many AP groups—when attempting to manage their practices to optimal levels of revenue and pathologist compensation—fail to use the best key performance indicators (KPIs) that can be developed from every group’s billing reports and financial statements.
Stated differently, many pathology groups have not regularly updated their coding/billing/collection and financial reporting systems in ways that allow them to do two things. One, to extract accurate, detailed information that allows them to better manage revenue and reduce costs. Two, to access this information in real time, so as to intervene more effectively.
Most physician groups, anatomic pathology (AP) practices, and other healthcare providers get their advice from practice management consultants and certified public accountants. In an interview with THE DARK REPORT, Sirmon said these advisers are well versed in the basics of accounting, taxes, and business management.
Yet, noted Sirmon, these advisors often don’t fully understand the unusual characteristics of the anatomic pathology profession and how to help pathology groups boost productivity, revenue, and partner compensation.
“Management consultants and CPAs are knowledgeable about the problems and idiosyncrasies inherent in the standard medical practice’s billing, collections, and accounts receivable activities,” stated Sirmon. “By contrast, AP groups with their own histology labs are not like most other physician groups.
Histology Lab Activities
“Pathology groups with these histology labs are more akin to small manufacturing companies,” he observed. “That’s why AP practice advisers need to understand the process involved in preparing slides for review.”
Sirmon can make these observations about practice management consultants and CPAs because he practiced as a CPA for many years. He no longer retains his CPA license, however, because he does not practice accounting in his current role.
Since 2016, Pathology Practice Advisors has performed reviews of the coding compliance and billing performance of more than two dozen AP groups nationwide. Sirmon and Manning typically find these groups using procedures that were successful in earlier, simpler times.
Revenue Left on the Table
“Many pathology groups leave substantial sums on the table,” observed Sirmon. “Further, pathologists in these groups are often unaware of the need to update their coding compliance and billing practices in response to more complex claim-submission requirements from all payers. Today, pathologists must document claims thoroughly in order to respond to tougher audits.
“The demands of practicing medicine and managing an independent AP group leave few pathologists with the time or tools to evaluate and optimize financial performance effectively,” Sirmon explained. “All too often, neither the practice nor the billing company are reviewing the monthly billing reports and financial statements. That’s why problems and opportunities go undiscovered and revenue is lost. That is a direct reason why pathologist compensation is less than it might otherwise be.”
As revenues decline and expenses rise, every AP group needs to understand the many, various elements that go into analyzing the revenue and expenses of their businesses. Therefore, when working with pathology groups, Sirmon and Manning do a deep dive into financial and performance records in the following ways:
- First, they review the CPT and ICD-10 coding;
- Second, they analyze the revenue cycle in detail, including all charges, contract adjustments, collections, refunds, bad debt, and receivables;
- Third, they compute key performance indicators and benchmarks to evaluate billing performance; and,
- Fourth, they review the expense side of the income statement.
In these reviews, Sirmon and Manning gather data needed to match the AP group’s fixed and variable costs to its various sources of revenue. “This level of analysis reveals how certain health plans may not pay enough to cover the costs of a particular pathology service—meaning that service operates at loss for that pathology group,” commented Sirmon.
Payment Less Than Lab Cost
For example, one insurer may not pay enough for the technical component of immunohistochemistry stains, Sirmon noted. “The only way to know that fact is to analyze what each payer pays for each component of such work, then determine what your group’s costs are to produce these stains,” he said. “If a pathology practice does not do such an analysis, then it may never learn that it’s losing money on that work for that health plan.
“The traditional role of consultants like myself and others is to monitor a practice’s billing, and that’s certainly important,” he added. “During our analysis of an anatomic pathology group’s operations, we review both the revenue and expense sides of the profit-and-loss statement. That includes a comparison of revenue and expenses.
“We begin with the practice’s accounting program and look at income minus expenses to get the practice’s net income,” continued Sirmon. “Unfortunately, many pathology practices use the general ledger chart of accounts that comes with their accounting program. The P&L may have only two sections, income and expenses.
“We prefer to use a classified P&L that has the following sections: income; cost of sales (technical component); gross profit; selling, general and administrative expenses; income before physician expenses; physician expense; and net income,” he added.
“Another important factor is that many practices have income from both hospital patients and outreach patients,” Sirmon explained. “For outreach patients, a pathology group may bill globally and either make or buy the technical component. Therefore, if the group compares only the hospital-based revenue to the outreach revenue, it would have misleading numbers because a portion of outreach revenue is used to pay for the technical cost.
“Also, the pathology practice may have other sales and marketing expenses for the outreach business [that are not incurred for inpatient cases],” he added. “That’s why it’s much more meaningful to compare the income-before-physician-expenses of the group’s hospital patients to the income-before-physician-expenses of the group’s outreach patients.
“After reviewing the pathology group’s billing and collections reports, we typically perform an audit by pulling a random sample of cases,” Sirmon explained. “This gives us additional information about the practice’s billing. It also gives us some assurance that its billing reports accurately reflect how the practice performed.
“We pull the random sample from the various accession logs that the practice uses,” he said. “We want to pull the sample from these logs to test that all cases get recorded in the system. A pathology group cannot collect if the case never gets into the billing system in the first place!
“For most pathology practices, these 100 cases give us a good sample,” he added. “This is especially true if the sample is selected on a statistically random basis.
Using the Right Financial Metrics to Analyze Pathology Collections, Revenue Performance
TO FILE A CLAIM with the federal Centers for Medicare and Medicaid Services, clinical laboratories and anatomic pathology practices use the CMS 1500 health insurance claim form.
Al Sirmon, founder of Pathology Practice Advisors, explained that this form has some 30 places for practices to include data on each claim, such as the diagnosis code, the referring physician, the pathologist involved, the CPT code, location, and place of service. In addition, the explanation of benefits from each payer provides useful data as well. “Using data from these two forms allows pathologists to identify trends in a practice, along with financial problems the practice needs to address,” he said.
Pathology Example A: Financial Analysis*
Pathology Example B: Analysis of Pathology Cases
Example A above shows the net collection percentage at 84.4%, which is below the goal of 90%. Example B above shows the data for several key performance variables of a real pathology practice. “To develop these data points for a real anatomic pathology group, we created a pivot table by taking all payments from each hospital and totaling those payments by CPT code, place of service, location, pathologist, referring physician, and other variables,” explained Sirmon.
“By sorting the data in this way, we revealed that insurers for one hospital were rejecting some claims submitted by the hospital due to lack of appropriate patient demographic data,” he said. “Getting more patient information helped turn denied claims into paid claims for this pathology group.”
Example C below shows how key performance indicators (KPIs) were calculated from the data presented in Examples A and B above.
Pathology Example C: Key Performance Indicators
Documenting 100 Cases
“For each one of these reviews, we gather the following supporting documentation for those 100 cases,” said Sirmon. “For each case, we look at the requisition, Pathology Dx Report, CMS 1500, explanation of benefits, and remittance advice.
“The first phase of the audit is to review the CPT coding by reading the Pathology Dx Report and comparing the actual codes and number of units that should have been charged to what was actually charged, he stated. “At this time, we also make sure proper modifiers, such as the 59 modifier, were used.
“The next phase of the audit deals with billing performance,” explained Sirmon. “This includes four major areas: charge capture, payment posting, patient responsibility, and follow up. Under charge capture, we audit to confirm all accessions were properly recorded and entered into the billing system accurately and timely.
Patient Responsibility to Pay
“For payment posting, we ensure that payments, contract adjustments, and denials were entered accurately,” he added. “The patient responsibility section is becoming more important as deductibles and co-insurance amounts rise.
“This section is important because we must verify the pathology practice has processes in place to collect these amounts from patients,” he commented. “This includes review of data from patient statements, call centers, and patient portals. Under follow up, we look at whether amounts that were written off as bad debt—or those still in accounts receivable—had been adequately worked to collect the balance.
“At the conclusion of this phase, we can compute an error rate for the above procedures,” he said.
Sirmon noted that the final phase of the audit summarizes the 100 cases to show the total revenue cycle, as follows:
- Net charges, which is gross charges minus contract adjustments; and,
- Net collections, bad debt, and amounts still in accounts receivable, which is calculated from gross collections minus refunds.
Key Performance Indicators
“From there, we can compute the following key performance indicators: net collection percentage, bad debt percentage, and amount still in accounts receivable,” he said.
“We also compute other benchmarks,” continued Sirmon. “These include gross collection percentage, average charge per case and per CPT, along with average collection per case and per CPT. Next, we compare these key performance indicators and benchmarks to the pathology group’s year-end results from its billing and collection reports.
“These basic numbers are the foundation for helping a pathology group optimize operations and revenue,” noted Sirmon. “The good news is that—given the analytical software tools available today— it’s possible for any anatomic pathology group to look even deeper under the hood to understand what’s happening financially at a granular level.”
Al Sirmon to Speak in New Orleans at Executive War College
Sirmon will discuss five power analytics that anatomic pathology groups can use to boost revenue. Visit www.executivewarcollege.com to register.
Facing Price Cuts and Less Revenue, Some Pathology Groups Do Deep Financial Analysis
REGULAR REDUCTIONS IN THE PRICES health insurers pay for anatomic pathology services means less revenue for pathology groups. In turn, that means less compensation for pathologists in these practices.
For pathology groups that want to anticipate and stay ahead of these payer cutbacks, more detailed and regular analysis of their billing/coding/collections activities becomes essential. However, one hurdle is that many pathology groups have billing software and business practices that date back years. By contrast, today payers are more demanding of documentation and ready to conduct rigorous audits. These expose a pathology group to risk of more denials and large recoupment demands from a payer audit.
Deep Financial Analysis
“This is why some of our pathology clients ask us to go deeper than most advisers in our assessment of their operations, their revenue, and the net margins they have to distribute to partners,” stated Al Sirmon, founder of Pathology Practice Advisors. “We can do data mining for pathology practices that want a more sophisticated assessment of their operations and finances,” he said.
“When I talk about doing a deep dive into a pathology group’s numbers, I get almost evangelical about how pathologists should look at the data they have and use that data to start asking questions about what’s happening in their groups,” he said.
“For example, in just this past year, we found three different pathology practices that had to refund money because they were billing a particular place of service incorrectly,” he recalled. “Although they had to refund that money, they were thankful that these problems were identified and rectified before too many months went by. If the problem had gone undetected much longer, they would have had to pay even more than they did.”
For a deep dive into a group’s financials, Sirmon and Manning will produce income and expense reports by:
- CPT code;
- Location (meaning work done in one hospital versus the same work done in another hospital, physician’s office, or ambulatory surgical center);
- Payer; and,
- Place of service (whether the work was done for a hospital inpatient, a hospital outpatient, in a physician’s office, ASC, or in an independent lab).
“These numbers provide a more thorough understanding of costs versus revenue,” noted Sirmon. “Using these numbers, it is possible for us to go even deeper in our financial analysis by picking any combination of these numbers and comparing the different values. For example, we can review CPT codes and revenue by payer and place of service by location.
“Another analysis involves reviewing revenue and expenses by CPT code and place of service or revenue and expenses by payer and pathologist,” he said. “This level of data helps the practice to understand its strengths and weaknesses.
“Take the case of a pathology group that does not get paid enough by one payer for a certain CPT code to cover its expenses for that work,” he added. “The practice administrator can then meet with the payer and use these numbers to show why its payment is insufficient to cover the group’s costs. We also can help the group show how that payer’s current payment is lower than what the pathology group gets from other payers for that same work.”