Policing your commercial payments—staying in (or getting in) the black

Marc G. Mertz

Health Check, Inc.

This article was published in the March 2008 Healthcare Financial Management magazine

The American Hospital Association (AHA) has reported that 25 percent of U.S. hospitals lost money during 2005 (AHA, TrendWatch Chartbook 2007, Trends in Hospital Financing, Chart 4.1). Healthcare leaders are all too aware that today's healthcare industry is faced with rising costs and flat (or even declining) revenue. According to the AHA's TrendWatch Chartbook 2007, the average hospital's operating margin was 3.6 percent in 2005; during the same time frame, the average hospital's patient margin was -2.8 percent (Chart 4.2: Aggregate Total Hospital Margins, Operating Margins, and Patient Margins, 1991.2005). Fortunately, hospitals often have revenue from non patient care operations to help offset these operating losses.

One way in which hospitals can increase revenue is by auditing payments from managed care programs with which they contract. In the December 2005 issue of hfm magazine, Martin D'Cruz and Terri Welter listed the need to audit commercial insurers' payments for accuracy as one of the top five payment trends. "Underpayments and denials continue to erode the bottom lines of U.S. hospitals," they write. "A recent survey shows that 8 percent to 14 percent of commercial revenue goes uncollected, and the number is much higher for hospitals that lack an effective audit function." How (or if) hospitals respond to this issue can have a significant impact on their financial performance.

Unfortunately, many hospitals lack a structured program designed to audit managed care payments. Some facilities may consider their managed care volume to be too low to warrant special auditing; others may simply lack the resources to address this issue.

Nevertheless, developing a program for auditing and recovering managed care underpayments is very important — and doesn't have to be overwhelming. Hospitals can use software applications designed to identify underpayments, focus on a manual auditing process, or implement a combination of the two.

The recovery unit should call payers frequently regarding underpaid claims-at least every two weeks. Yet whom the representative calls is often more important than how often he or she calls.

Software Applications
The managed care auditing program in many hospitals consists of a software program purchased to identify insurance payments that are below expected levels. The various types of software programs available — coding scrubbers, contract management systems, and reimbursement calculators — can effectively identify lost revenue. These systems work quickly, often without significant manual effort.

Many of the leading patient accounting systems in use at hospitals include modules designed to identify underpayments. Other stand-alone applications are designed to interface with most hospital systems. Both types of systems can be effective; however, like any software application, these tools are only as good as their implementation and the data entered into them.

Despite significant progress in software development, these systems can often miss certain types of underpayments. For example, contract loopholes, silent preferred provider organization (PPO) activity, and interpretation issues can be difficult for software to identify. Typically, even the best software applications can miss underpaid accounts, which can add up to millions of dollars of lost revenue per year at larger facilities.

The primary advantage of software systems is their efficiency. A properly installed application can review thousands of claims at a time and identify discrepancies from expected reimbursement. Frequently, these discrepancies are automatically documented in the patient accounting system, and therefore are immediately available for billing and collection staff to pursue.

Also, despite their large price tag, software systems can generate significant value over time. When compared with the expense of creating an auditing unit within the hospital's patient financial services department, the expense of a software system may be easily justified. Regardless of which software system is implemented, however, the hospital still needs staff to recover the identified underpayments. In some cases these collection efforts can be assigned to existing billing or patient financial services staff; in other cases, the hospital is required to assemble a dedicated collection team.

A hospital with significant managed care volume should still consider implementing a manual auditing process to review the results of any software application, as well as to identify underpayments that may otherwise have been missed.

Manual Auditing
In manual auditing, every managed care account is reviewed by an individual who understands the various hospital reimbursement methodologies as well as managed care contracts. Each account's reimbursement should be reviewed, recalculated, and compared with the expected payment as dictated by the prevailing managed care contract. Although timeconsuming, these steps can be very rewarding in terms of additional reimbursement to the hospital.

Given privacy concerns, many hospitals prefer to develop internal managed care auditing capabilities rather than consider outsourced options. Assuming that a hospital has qualified managed care auditing and management staff (or access to such individuals), the development and operation of an internal auditing team can be fairly straightforward to implement. Qualified individuals should have experience in medical billing, procedural coding, medical appeals, denial management, and/or medical collections.

Working within the hospital's patient accounting software, an internal auditing unit can manually review the transactions for all managed care accounts. To avoid overlap with normal collection efforts, the unit should review only accounts that have reached a zero insurance balance or that have been previously denied for additional payment. Accounts with outstanding patient balances should be audited for proper insurance payments. Waiting for patient-portion balances to be fully paid will frequently result in exceeding a payer's timely appeal requirements.

Auditing staff should also review accounts for frequent underpayment types, such as a payer's failure to pay for contractual carve-outs such as implants. To facilitate a more accurate and efficient auditing process, the staff should develop and use contract matrixes that summarize the covered services and corresponding rates for each contract. These matrixes should be developed and maintained by individuals with experience working with contracts. No matter their experience, those responsible for the matrixes should always have someone else review the matrixes for accuracy, as well as their interpretation of the contracts' terms. A single contract misinterpretation can lead to auditors missing hundreds of thousands of dollars in underpayments.

Once an underpayment is identified, the auditing team should conduct a benefit confirmation call to ensure that the patient was covered by the payer indicated in the hospital's patient accounting system. Benefits frequently change, and if the registration process did not capture the patient's current plan, the underpayment may not be recoverable.

Recovery
For any underpayments that have been identified and confirmed, the accounts can be returned to the regular billing staff (or, if the internal unit includes recovery staff, they can begin their collection efforts immediately). Collection efforts can be documented in the hospital's patient accounting system, or in commercially available software.

The recovery unit should call payers frequently regarding underpaid claims-at least every two weeks. Yet whom the representative calls is often more important than how often he or she calls. Most plans' customer service departments are ill-equipped to respond to requests for reprocessing or to questions regarding contract terms.

Increasingly, these departments are outsourced, often overseas, and lack the authority to effectively respond to demands for additional payment. Such requests should be taken to customer service supervisors, or to the facility's provider relations representatives.

Besides telephone calls, the recovery unit may also need to file written appeals on some underpaid accounts. These appeals offer an opportunity for the recovery unit to outline the terms and provisions of the agreement that allow for additional payment, as well as to provide language from applicable state laws and statutes that support the request for additional payment or preprocessing.

The costs associated with developing an internal auditing and recovery unit are fixed, meaning that regardless of how much money is identified or recovered, the hospital's expenses will remain unchanged. Staff salaries, benefits, rent, computers, office equipment, and supplies will cost the same amount, whether the unit recovers $1 million or $25,000 per year. As a result, many hospitals hesitate to create a unit to manually audit their managed care accounts.

Outsourced Managed Care Auditing Firms
If the effort and costs associated with developing an internal unit are more than the hospital is willing to take on, at least initially, then consideration should be given to an outside auditing firm. Firms that are structured and staffed specifically for the functions associated with managed care auditing can effectively operate as an extension of the hospital to help identify and recover underpayments. Some auditing firms specialize in silent PPO auditing, which presents specific challenges. Other firms audit for both standard managed care underpayments as well as silent PPO activity.

In addition to auditing and recovery, outside managed care auditing firms should be able (and willing) to provide a hospital with observations regarding potential loopholes in their managed care contracts, as well as recommendations for closing those loopholes.

Most managed care auditing firms charge hospitals a monthly fee, plus a portion of what they successfully recover. Depending on the underpayment volume, these arrangements can sometimes be more costly than developing an internal auditing unit.

However, some auditing firms are strictly based on contingency fees. These arrangements can be attractive to a hospital because they essentially eliminate the risk of spending money only to find that the hospital is being paid correctly, or is successfully recovering underpayments on its own. If the hospital has purchased expensive software, this form of secondary review can be a risk-free method of generating a significant amount of additional revenue.

Failure to carefully audit every managed care payment, whether with software or manually (or both), can result in thousands or even millions of dollars of lost revenue every year at a hospital. In today's healthcare industry with its razor-thin operating margins, this can mean the difference between a year in the red and a year in the black.

• Marc G. Mertz, FACMPE, is president, HealthCheck Incorporated, Mexico Beach, Fla., and a member of HFMA's Florida Chapter (marc.mertz@hcaudit.com).