Continuing my series offering best practices and tips to address the many challenges executives at health centers face, this month I am addressing the topic of revenue cycle, particularly evaluating the accounting for your revenues.
In my travels and discussions with health care executives throughout the years, some of the top questions I am asked include: Are we billing for everything? Are we accurately completing claims? Are we collecting what we bill? Are we collecting what we are supposed to collect? Are our rates appropriate? Why does cash collections seem to be lower than our revenues? Are our revenues as posted in our financial statements accurate? Health care executives struggle to understand the correlation between their financial reporting, cash flow, and their general sense of the business. Does this sound familiar? If you are reading this, my guess is that you have had similar questions.
You probably need to assess your revenue cycle if you are uncertain about the answers to these questions. There are of course many factors. In order to answer the questions above, you need to address:
The concentration of this article is the actual accounting for revenues. Just as important as producing timely financial data is producing accurate data. Accurate revenue recognition in a health center is very important, contains significant estimates, and can have a material impact on the organization’s financial results. The accounting estimate for contractual adjustments is likely the most significant estimate within your financial statements and is prone to error. Get this calculation wrong and the health center’s financial statement results could be materially misstated.
Accounting for your health center’s revenues is made complicated by the number of moving parts - multiple service lines, dozens and dozens of insurance contracts, all with different requirements, coupled with tight resources to tackle this complicated area.
I recommend aligning the accounting with your business, meaning your financial statements should present revenues first by level of service and then by payor source. This allows for appropriate analysis compared to visit and encounter activity. That may seem obvious but many health centers have not set up their chart of accounts this way. Many health centers are simply accounting for revenues by payor source. I have even seen revenues presented in total, not by service line, which makes it difficult to assess lines of business.
Another concept that may seem obvious is that revenues should be recorded on an accrual basis, as opposed to cash basis. I write that advice because some health centers are presenting financial statements on a cash basis. The problem with this approach is that if the health center has a bad collections month, revenues will appear to be inappropriately decreased. A bad collections month is a problem for sure, but collections is a financing issue, not revenue. It may be a leading indicator of other issues as addressed above.
Of course the key to accurate revenue recognition is properly converting gross revenues to net revenues. Ideally the health center should input fees into the electronic health record and billing system (EHR) so that expected collection rates can be easily assessed and also expected reserves can be calculated. Additionally, the accounting department should integrate the EHR system and the accounting software, but many health centers have not made that investment.
Revenues should be recorded based on gross charges, and a separate calculation of contractual adjustments should be performed. This approach allows charges to be more easily reconciled to visits as a first test of accuracy. It is important to understand and properly apply accurate discount percentages against revenues and accounts receivable. If the accounting system does not have the tools to perform this calculation using the EHR system, and instead calculates reserves manually, the approach is prone to material error and needs to be monitored closely. Best practices are to check the allowance percentages by service line and major payor two to four times per year. It is important to compare cash collections to understand the correlation between collections and revenues.
I find that many health centers are challenged with this very important area of financial reporting, oftentimes relying on the year end audit process to “clean up” revenue recognition. A good monthly systemic approach will minimize year end work but more importantly the health center’s monthly financial reporting will be accurate and management can use the data to make informed decisions. It can be disastrous to make decisions based on materially overstated revenues because the money simply will not be there. The good news is that a proper assessment can identify the path to improved information. I would welcome the opportunity to have a conversation about these matters with you.
Karl spends his time thinking about ways to help organizations with sound financial decisions.
Proudly powered by Weebly