RCM: The untapped potential for lab valuation
July 19, 2018
By Vicki DiFrancesco
In today’s shifting healthcare environment, lowering cost of care and increasing reimbursements are more important than ever. For laboratories in particular, finding the best ways to increase both revenue and operating margins is of critical importance.
The complexity of lab revenue cycle management (RCM) is unmatched in all of healthcare, as labs routinely perform thousands of tests – and that number is continuously growing. Each of these tests brings its own coding and billing challenges, which are exacerbated by constantly changing requirements and rules for coverage and reimbursement by third party payors. With all of these challenges, RCM is an important way that lab leaders can increase the profitability and valuation of their business in the near term.
Challenges abound in the lab market
No one can say for certain how the healthcare landscape will evolve over the next few years, let alone the next decade, but several things are clear. Insurance companies will continue to look for ways to cut costs. Therefore, the already small profit margins of some labs will evaporate unless proactively managed. Volume of tests will continue to go up, but economies of scale will be necessary to take the greatest advantage of this growth. Even the largest labs are likely to see reductions in profit margins, meaning labs of all sizes must find ways to maximize the returns of every claim.
The good news is that RCM is one of the fastest routes not only to financial improvement, but to successful navigation of the financial and regulatory challenges of today’s market. Some of the main challenges facing labs that RCM can address include compliance, coding issues and manual workflow inefficiencies. Here’s why addressing these areas is so critical:
• Avoid costly penalties through compliance – Many labs do not fully realize how serious non-compliance can be. In the eyes of the Office of Inspector General (OIG), a mistake by the billing staff is not distinguished from fraud – and there are serious penalties. For example, an average lab testing claim that might originally cost around $50 could result in potential damages in the amount of $30,000 due to a single incorrect procedure code. Reporting around the Protecting Access to Medicare Act (PAMA) is another challenge for labs. Under PAMA, there are strict penalties for non-reporting, and labs can face up to $10,000 in penalties per day for failure to report, or misrepresentation or omission in reporting applicable information.
• Always consider coding – Coding challenges are another significant issue for labs, often resulting in rejected claims or undercharges from third party payors. Many traditional billing systems have some flexibility in setting up individual testing codes and the associated fees from CMS. Most of these systems have limitations, such as the lack of intelligent automation, so they correlate the codes to a billing amount that meets generalized rather than specific payor rules. This may lead to rejected claims or undercharges, leaving reimbursement dollars behind. The alternative to this is to manually set each testing code reimbursement rate for each of the hundreds of payors, which introduces a high likelihood for error.
• Address workflow inefficiency – This leads into another big challenge for labs that can further squeeze their margins – errors and excess costs caused by manual workflow inefficiencies. Managing account receivables is about accuracy and timeliness, which are dependent on workflow. With labs representing two percent of healthcare spending but 30 percent of all claims filed, they see some of the smallest margins in healthcare, meaning manual processes and inefficient labor usage can further erode an already thin margin. Since up to 40 percent of lab claims are known to have missing or inaccurate information, tracking claims that are problematic and correcting them in real time introduces further potential for error. CMS statistics indicate that only about half of denied claims are ever returned for processing. It is precisely these exception claims, as well as inaccurate net versus gross revenue recognition, that cause labs to lose up to half of their profits.
Improving lab revenue through RCM
Many of these challenges are a result of outdated information technology infrastructure (IT) and tools. Incorporating a comprehensive RCM system that includes financial integrity, flexibility, connectivity, automated workflows and business intelligence can play a significant role in impacting a lab’s business and help better manage workflow. Intelligent automation is especially key for consistent and standardized claims exception handling, relieving the lab from relying on the manual decisions of billing clerks in a very complex regulatory environment.
Labs need complete RCM systems that are built on a solid financial foundation with referential integrity and the financial sophistication to provide general ledger-ready, compliant financial reporting. This requires greater drilldown detail, monitoring capabilities and adaptability to ever-changing requirements. Cloud-based RCM systems can help make these goals possible by allowing labs to remain flexible and agile, freeing them from traditional software and its hidden costs and risks.
Focusing on RCM for future financial success
Lab leaders not only need to have a firm handle on revenue, but also need the tools to be able to identify when the lab is being chronically under-reimbursed. Having this understanding – and the data to back it up – supports the pursuit of additional collections, as well as payor contract renegotiation. With an advanced level of data and automation, labs will no longer lose out on revenue. Having a robust RCM system allows labs to better track key performance indicators such as profitability by payor, profitability by provider, and other management data that are necessary to strategically manage the business.
A lab’s financial success and valuation is all about top line revenue, profitability and minimizing risk. RCM is the key for labs to unlock valuation success.
About the author: Vicki DiFrancesco is the chief strategy officer for XIFIN
In today’s shifting healthcare environment, lowering cost of care and increasing reimbursements are more important than ever. For laboratories in particular, finding the best ways to increase both revenue and operating margins is of critical importance.
The complexity of lab revenue cycle management (RCM) is unmatched in all of healthcare, as labs routinely perform thousands of tests – and that number is continuously growing. Each of these tests brings its own coding and billing challenges, which are exacerbated by constantly changing requirements and rules for coverage and reimbursement by third party payors. With all of these challenges, RCM is an important way that lab leaders can increase the profitability and valuation of their business in the near term.
Challenges abound in the lab market
No one can say for certain how the healthcare landscape will evolve over the next few years, let alone the next decade, but several things are clear. Insurance companies will continue to look for ways to cut costs. Therefore, the already small profit margins of some labs will evaporate unless proactively managed. Volume of tests will continue to go up, but economies of scale will be necessary to take the greatest advantage of this growth. Even the largest labs are likely to see reductions in profit margins, meaning labs of all sizes must find ways to maximize the returns of every claim.
The good news is that RCM is one of the fastest routes not only to financial improvement, but to successful navigation of the financial and regulatory challenges of today’s market. Some of the main challenges facing labs that RCM can address include compliance, coding issues and manual workflow inefficiencies. Here’s why addressing these areas is so critical:
• Avoid costly penalties through compliance – Many labs do not fully realize how serious non-compliance can be. In the eyes of the Office of Inspector General (OIG), a mistake by the billing staff is not distinguished from fraud – and there are serious penalties. For example, an average lab testing claim that might originally cost around $50 could result in potential damages in the amount of $30,000 due to a single incorrect procedure code. Reporting around the Protecting Access to Medicare Act (PAMA) is another challenge for labs. Under PAMA, there are strict penalties for non-reporting, and labs can face up to $10,000 in penalties per day for failure to report, or misrepresentation or omission in reporting applicable information.
• Always consider coding – Coding challenges are another significant issue for labs, often resulting in rejected claims or undercharges from third party payors. Many traditional billing systems have some flexibility in setting up individual testing codes and the associated fees from CMS. Most of these systems have limitations, such as the lack of intelligent automation, so they correlate the codes to a billing amount that meets generalized rather than specific payor rules. This may lead to rejected claims or undercharges, leaving reimbursement dollars behind. The alternative to this is to manually set each testing code reimbursement rate for each of the hundreds of payors, which introduces a high likelihood for error.
• Address workflow inefficiency – This leads into another big challenge for labs that can further squeeze their margins – errors and excess costs caused by manual workflow inefficiencies. Managing account receivables is about accuracy and timeliness, which are dependent on workflow. With labs representing two percent of healthcare spending but 30 percent of all claims filed, they see some of the smallest margins in healthcare, meaning manual processes and inefficient labor usage can further erode an already thin margin. Since up to 40 percent of lab claims are known to have missing or inaccurate information, tracking claims that are problematic and correcting them in real time introduces further potential for error. CMS statistics indicate that only about half of denied claims are ever returned for processing. It is precisely these exception claims, as well as inaccurate net versus gross revenue recognition, that cause labs to lose up to half of their profits.
Improving lab revenue through RCM
Many of these challenges are a result of outdated information technology infrastructure (IT) and tools. Incorporating a comprehensive RCM system that includes financial integrity, flexibility, connectivity, automated workflows and business intelligence can play a significant role in impacting a lab’s business and help better manage workflow. Intelligent automation is especially key for consistent and standardized claims exception handling, relieving the lab from relying on the manual decisions of billing clerks in a very complex regulatory environment.
Labs need complete RCM systems that are built on a solid financial foundation with referential integrity and the financial sophistication to provide general ledger-ready, compliant financial reporting. This requires greater drilldown detail, monitoring capabilities and adaptability to ever-changing requirements. Cloud-based RCM systems can help make these goals possible by allowing labs to remain flexible and agile, freeing them from traditional software and its hidden costs and risks.
Vicki DiFrancesco
Lab leaders not only need to have a firm handle on revenue, but also need the tools to be able to identify when the lab is being chronically under-reimbursed. Having this understanding – and the data to back it up – supports the pursuit of additional collections, as well as payor contract renegotiation. With an advanced level of data and automation, labs will no longer lose out on revenue. Having a robust RCM system allows labs to better track key performance indicators such as profitability by payor, profitability by provider, and other management data that are necessary to strategically manage the business.
A lab’s financial success and valuation is all about top line revenue, profitability and minimizing risk. RCM is the key for labs to unlock valuation success.
About the author: Vicki DiFrancesco is the chief strategy officer for XIFIN