Improve Your AP Group’s Financial Performance

Additional revenue can be collected by use of several essential key performance indicators

CEO SUMMARY: Across the nation, health insurers are paying less for anatomic pathology services. This shrinks pathology group revenue and reduces pathologist compensation. Savvy pathology groups are responding to this trend by reviewing long-standing processes in their coding, billing, and collections department. Their goal is to update these billing and collections processes in ways that allow the pathology group to collect more of the money legally due it from payers.

Part Two of a Series

PRIVATE PATHOLOGY GROUPS face their most serious revenue challenges since Medicare introduced diagnosis-related groups in 1983. Since then, the federal Centers for Medicare and Medicaid Services and commercial insurers have cut deeply into what they pay pathologists for the technical component and professional component of their services. Therefore, it’s imperative that pathology groups pay close attention to coding, billing, and collections.

Get the Most from Billing

Part one of this series about anatomic pathology billing and collections included an overview of how AP groups can get the most from their coding, billing, collections, and financial reporting systems. (See “Anatomic Pathology Groups Can Protect Both Revenue, Pathologist Compensation,” TDR,” April 8, 2019.)

To improve the financial management of any AP practice seeking to maximize revenue and pathologist compensation, Al Sirmon, co-founder along with Chappy Manning, of Pathology Practice Advisors, of Columbia, S.C., advise pathologists and their practice administrators to look more closely into the financial performance of their practices to get an inside look at the opportunities for improvement that may not be obvious otherwise.

Using data from a group’s billing software, he plugs those numbers into a spreadsheet to identify problems and trends. Among the most useful data are key performance indicators (KPIs) that include net collections, bad debt, and days in accounts receivable (AR).

“Most billing software programs allow easy access to the data we need and have useful analytical tools,” Sirmon said.

“One useful function is the ability to download data into a spreadsheet,” he noted. “I then create a pivot table from that spreadsheet.

“Once the pathology group puts its data in a pivot table, it can slice and dice the numbers in a variety of ways to gain insight into that particular part of its practice,” he explained. “For instance, one KPI is the net collection percentage.

“For decades, we told pathologists that net collections should be above 90% and bad debt should be less than 10%,” he said. “But today, those benchmarks are difficult for pathology groups to reach and sustain.

“In addition, days in AR should be around 40,” he added. “But getting AR days to about 40 is more difficult today than ever before because of high-deductible health plans (HDHPs).

High-Deductible Health Plans

“Some patients have deductibles of more than $7,000 a year, which means these people need to be handled like self-pay patients,” said Sirmon. “When patients’ responsibility levels are high, collection processes slow down and that affects the pathology group’s financial targets.

“Not only is it difficult for the typical pathology group to get its AR days to 40, but it’s also hard to hit 90% in net collections,” he commented. “Currently, we recommend that good targets for collections and bad debt are about 88% and 12%, respectively. For days in AR, we recommend somewhere between 40 and 50. These numbers vary based on payer mix.

“Sometimes, despite considerable billing efforts, it remains difficult for a pathology practice to hit its goals due to the economics of the region,” Sirmon said. “But with effort, it’s still possible to make worthwhile progress. Recently, we saw a practice that had net collections above 90% because their billing team looked closely at the data before they turned claims over to a collection agency.

Data Mining, Pivot Tables

“When trying to identify the source of problems, data mining and pivot tables can make a big difference to an AP practice,” Sirmon suggested. “Many practices look only at their income and expenses on the P&L. If they have enough cash to cover expenses and salaries, then they devote their time to all the many other problems of running a pathology practice.

“But that ignores the opportunity to collect a larger proportion of money legally due the practice,” he continued. “I recommend pathology groups go much deeper and do a more complex analysis by looking first at patient revenue in detail.

“This should include a thorough examination of the complete revenue cycle, including gross charges minus contract adjustments (which equals net charges),” explained Sirmon. “Next, review gross collections minus refunds to get net collections, bad debt, and AR.

“We use the same principle with patient revenue,” he said. “To do that, we start with the pathology group’s beginning-accounts receivable plus gross charges. We then subtract contract adjustments, gross collections, refunds, and bad debt to get to ending-accounts receivable.

Key Performance Indicators

“Once we have these numbers, we can compute the key performance indicators,” he said. “That’s your pathology group’s entire billing cycle simplified down to seven numbers. Those numbers show your pathologists everything that happens in the billing department.

“Remember, each time a pathologist signs out a case, it generates a gross charge,” he noted. “That gross charge is paid by the insurance company or the patient. If it’s not paid, the group will write it off as a contract adjustment or as a bad debt. If it’s not paid and not written off, it remains in your data as a receivable.

“After following all these steps, it then becomes relatively simple to follow the numbers to see if a pathology group has a problem and find the source of that problem,” he recommended.

“With these numbers, your pathology group can review all the data on accessions for a month, a quarter, or a year,” advised Sirmon. “It is now possible to break this information down by CPT code, by payer, and by place of service—meaning whether the work was done for a hospital inpatient, outpatient, physician’s office, or ambulatory surgery center.

“It is also useful to break it out by location—meaning which hospital was involved,” he added. “Some of our groups have pathologists in multiple hospitals. Once a group follows these steps, it will see problems that need to be addressed.

To Improve Financials, Pathology Groups Can Use Key Performance Indicators, Benchmarks

PRACTICE CONSULTANTS OFTEN WILL USE the terms “key performance indicators” and “practice benchmarks” interchangeably. But in fact, the two phrases are distinct, according to Al Sirmon, founder of Pathology Practice Advisors.

“For any pathology practice, we typically analyze three key performance indicators (KPIs),” he commented. “Sometimes, we refer to these KPIs as external benchmarks because we use them to compare one practice against another.

“One KPI is net collection percentage,” he explained. “We compute the net collection percentage by comparing net collections to net charges. Net charges are gross charges minus contract adjustments. Net collections are gross collections minus refunds.

“Once calculated, these metrics tell us how much the pathology group collected, compared to what the practice was allowed to collect—meaning the allowed amount in payer contracts,” he said. “At one time, we would shoot for 90% or more in net collections. However, today, patients are responsible for a larger share of bills and so 88% may be more reasonable for net collections.

Bad Debt Percentage

“We calculate the bad debt percentage by dividing bad debt by net charges,” he explained. “This number shows how much the pathology group could collect compared with what it actually collected. In past years, we tried to keep this number at 10% or less. Currently, with patient responsibility so high, 12% or less is acceptable.

“At the end of a period—such as a month, quarter, or year—we will review the net collection percentage plus the bad debt percentage. These two numbers should equal 100%,” he recommended.

“For example, 88% for a net collection percentage, plus 12% in bad debt equals 100% of the allowable.”

Another common KPI is days in accounts receivable (AR), which is common in businesses that carry accounts receivable. “We calculate days in AR by dividing AR by average daily sales,” he said. “Once again, due to rising levels of patient responsibility, this number has increased. At one time, we targeted around 40 to 45 days as a good number. Now 50 days is the norm.

“These KPIs vary among pathology groups, depending on the payer mix and the economy of the region,” he said. “If any KPI is not what we expect, we will then compute that KPI for each health plan, CPT code, location, and place of service. This level of detail helps us identify any issues involving the pathology group’s revenue.

Useful Benchmarks

“After KPIs, the following benchmarks also are useful, if used cautiously,” added Sirmon. “That’s because these KPIs may not be comparable from one pathology group to another,” he explained. “In other words, they are most useful as internal benchmarks.

“One is the gross collection percentage, which is gross collections divided by gross charges,” he said. “This benchmark is useful to compare results from one period with another. For example, you may compare the gross collection percentage for 2018 to 2017.

“You should not, however, use the gross collection percentage to compare one practice to another because one practice will have different fees (charges per CPT coded) and insurance contract allowables than another,” concluded Sirmon.

Pathology Group’s Analysis

“Here’s an example: We had an assignment for a big practice,” he recalled. “For this practice, we placed all their data by accession for the year on a worksheet. We used a pivot table to analyze all the different ways of looking at those numbers.

“Because this pathology practice had so many different locations, we could see how that group might bill each one either globally or for the professional component only,” he explained. “For an AP practice, this factor is critical for two reasons. First, you need to know how to bill for each particular hospital patient. Second, you need to know if your group is billing correctly.

“For one hospital, if your group is billing only for the professional component, but instead you bill it globally, then you’ll be overpaid,” he warned.

“The opposite might be true if your group is supposed to bill for the global amount, but instead you bill only for the professional component. In this second example, the group would be leaving money on the table.

“These reports provide a quick way to identify those different kinds of discrepancies,” Sirmon advised. “And, your team can pick any combination it wants to analyze to identify problems that might be impossible to locate otherwise.”

Global Billing Approach

Sirmon provided a second example from an AP group that does a considerable volume of cases for two ambulatory surgery centers (ASCs). “The pathology group may need to bill one ASC globally and bill the other ASC for the professional component only,” he explained.

“Depending on the payer, it could be either way, which would be complicated for the billing department to know without looking at the payer’s contract. Therefore, a well-run pathology group will monitor that data closely to confirm that it is billing correctly.

“In cases where a pathology group’s billing company does not provide the data needed for such a deep analysis, the group can download its Medicare accession data in a spreadsheet format from the billing software,” he said.

“In this spreadsheet data, there’s a column for each of these items: CPT code, payer, pathologist, place of service, and location. There are also columns for the charge, contract adjustment, paid amount, bad debt, and receivable. Using these data, the group can build a pivot table and pick any two or three variables for analysis.

Use of Random Sampling

“A pathology group can analyze all the data from the download, or it can take a random sample of 100 cases—as we do,” he said. “When we do this type of analysis, we load the data into a worksheet and then use a pivot table to generate multiple ways to view the data. Whether the sample consists of 100 cases or 100,000 cases, the same principles apply.

“What you’ll find is that if your samples are truly random, you will see that even small samples are amazingly accurate,” he said.

“Once the analysis is complete, it’s important to validate the findings by comparing results for each segment of the pathology group’s data to the whole universe of data,” he concluded.

“You can do this by adding up each segment of data to see if it totals the whole for the month, quarter, or year. If anything looks out of whack, you’ll need look back to see where the analysis may have gone wrong.”

Contact Al Sirmon at al@pathologypracticeadvisors.com or 843-319-0605; Chappy Manning at chappy@pathologypracticeadvisors.com or 803-553-8717.

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