How technology and payment trends are impeding revenue excellence
Over the past five years, a number of trends have had a significant impact on how providers should manage their revenue cycles. Whether the changes are a direct effect of passage of the Affordable Care Act (ACA) or the result of broader shifts in healthcare coverage and payment, they have strongly affected the operation and performance of many providers’ revenue cycle activities. In this post, we summarize the four primary trends:
Shifts in bad debt
Providers’ bad debt levels have remained essentially unchanged over the past few years.1 However, the nature and type of bad debt have shifted: both payor denials and balance-after-insurance (BAI) bad debt have risen, and uninsured bad debt has declined.
Several adjustments health insurers made in recent years have increased denial and rejection rates. The reasons for rejection have changed in both type and complexity, driven in part by the growth in managed care government plans (in our experience, these plans tend to reject or deny claims at higher rates than traditional government plans). Additionally, insurers have started to tightly enforce their medical policies, putting greater focus on medical necessity as a prerequisite for payment, a trend that extends beyond commercial payors. In Q3 2016, for example, 81% of Recovery Audit Contractor denials were based on documentation and medical necessity factors.2 While these changes have not necessarily raised write-off levels, they have led to higher costs for providers, as additional resources are needed to understand and respond to the rejections.
Patient bad debt has shifted away from sums owed by uninsured patients to BAI, a result of growth in both insurance coverage and insured patient balances. Under the ACA, the uninsured rate fell from 14.7% in 2013 to 8.4% in 2017.3 (Many states that expanded Medicaid currently have even lower uninsured rates.) As a result, many providers saw reductions in total outstanding liabilities, and thus bad debt, for patients without insurance. However, BAI bad debt grew because of increased patient cost-sharing and average income stagnation. Between 2010 and 2016, for example, the average employee contribution to health insurance premiums for employer-sponsored family plans rose 77% (to $5,277, from $2,973).4 During that time, average American incomes largely remained flat.5 As a result, patients have less disposable income to allocate to healthcare bills, driving up BAI bad debt.
Complex patient financial responsibility
As financial responsibility has shifted from insurers to patients over the past five years, patient collections, particularly from insured patients, have become a much more important source of revenue for providers. Yet during that time, determining the amount that patients owed has become increasingly complicated, particularly for exchange-based enrollees. Since many exchange enrollees qualify for out-of-pocket (OOP) maximums, providers can no longer check just the deductible and co-insurance amounts; they must also look for ways to track the total OOP amount paid by that patient to date. Additionally, exchange plan turnover is high. Between 2014 and 2015, over half of the returning participants on the exchanges switched plans.6 Changes in enrollment status further complicate the liability calculation, as they require recertification of many financial clearance steps and prevent providers from relying on past patient encounters to predict future payment rates.
Change in payment methodologies
Despite the growing use of quality-based reimbursements, most payments are still encounter-based and have not yet affected providers’ financials substantially. However, quality-based reimbursements are expected to become more common in the future. Furthermore, other changes in payment methodologies have already increased providers’ resource requirements. Adoption of ICD-10,7 for example, obliges coding teams to create more nuanced and comprehensive documentation to accurately code claims. Risk-adjusted revenue from Medicare has forced payors and providers alike to focus on documenting the acuity of patients’ conditions. The result: providers must spend more time, effort, and resources to ensure documentation accuracy and manage denials.
Heavier administrative burden
The ACA reduced providers’ administrative burden in certain areas; for example, it streamlined enrollment processes and encouraged adoption of electronic transactions. However, several other factors resulting from ACA implementation have increased the overall administrative burden. In particular, the amount of financial clearance activity (particularly authorization requirements) rose, and these transactions are still largely manual. Some of the growth in clearance activity has been driven by the rising prevalence of narrow networks, but some has resulted from the increased attention now being paid to medical policies.
Path forward for providers
The trends discussed above, combined with broader changes in how and where care is delivered,8 have created significant new obstacles to strong revenue cycle performance. Providers will need to rethink their current revenue cycle operations and develop new capabilities. To succeed in the future, they will need to evolve from revenue cycle management to “revenue excellence.” To learn more about what revenue excellence entails, look for our upcoming white paper, which will be published on our website, healthcare.mckinsey.com.
- Different sources suggest different outcomes for bad debt. According to public financial statements for hospitals, from 2012 to 2016, bad debt remained between 6% and 7% of net patient service revenue. According to the American Hospital Association, uncompensated care (which includes charity care) went down substantially, from 6.1% in 2012 to 4.2% in 2015. However, the provision for doubtful accounts for the five largest public hospitals went from $8.7 billion in 2012 to $9.9 billion in 2015.
- American Hospital Association’s 2016 RACTrac survey.
- McKinsey MPACT Model.
- Kaiser/HRET. 2016 Survey of Employer-Sponsored Health Benefits.
- US Census Bureau. American Community Survey.
- ASPE Issue Brief. Health insurance marketplaces 2015 open enrollment period: March enrollment report. March 2015.
- Tenth revision of the International Statistical Classification of Diseases and Related Health Problems.
- For example, many types of care are being moved from inpatient to outpatient settings.