Growing importance of Revenue Cycle Management solutions amongst providers by Sutherland Global Services

Growing importance of Revenue Cycle Management solutions amongst providers 2012

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Revenue Cycle Process flow - Three critical stages Stage 1: Front End RCM

Stage 2: Mid-Level RCM

Stage 3: Back End RCM

Pre-Admission

Patient/Physician Encounter

Post-Discharge

• • • • •

Scheduling Eligibility verification Patient credit worthiness Pre-authorization Patient registration

• • • •

Case management Diagnosis and treatment Medical transcription Medical coding

• • • • • •

Claims generation and billing Receivables management Denials management Release of information Payment analysis Reporting and benchmarking

•

Stage I - Front End RCM encompasses all preadmission patient processes. Data accuracy in the front end is critical to creating clean claims and minimizing the disruption of back-end collections. Industry studies indicate that 90% of denied claims are caused by inaccurate collection of patient information on the front end. Critical front end data include source of payment and patient demographic information

•

Stage II - Mid Level RCM encompasses the physician/patient encounter and the related documentation. As the patient receives medical care, mid level RCM systems ensure complete and accurate documentation, transcription and coding. Complexity in this middle process often results in improper coding and revenue leakages as procedures are improperly documented and billed. In this stage, RCM companies create value by ensuring charge integrity and eventual creation of clean claims. EMR initiatives are likely to significantly impact mid level RCM companies, as case managers transition from manual reporting and traditional patient records to real-time reporting and electronic records

•

Stage III - Back End RCM encompasses all billing, follow-up and cash collection processes. While back end RCM systems are most commonly either credited or blamed for the cash collection cycle, the success of back end RCM systems is highly correlated with effective front end and middle processes in the revenue cycle

•

RCM firms serving providers offer software and services that maximize cash flow to healthcare providers by carefully managing and documenting the patient process from admission to discharge. Within the provider client base, RCM firms serve hospitals, physicians or both. RCM firms serving payers (often referred to as payment cycle management) manage the process from the opposite standpoint, ensuring payments provided meet coverage eligibility and ensuring claims accuracy. RCM companies claim that adequate revenue cycle management systems can improve hospitals’ net revenues by 1% to 3% and bolster operating margins by 1.5% to 5.0%

Source: Duff & Phelps

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Revenue Cycle Management from a provider perspective (1/3)

Step1. Pre-Visit

Review • Review Edit Report • Correct Claim

Business Pre-Visit • Registration • Insurance verification • Authorization

Step2. Check-In Patient Check-in • Time of service payments* • Real time system updates

• Inpatient • Outpatient

Are Claims Clean ?

Service Capture–Inpatient • Inpatient charge report • Hospital Face Sheet • Medical transcripts • Provider document services • Provider identifies procedure and Diagnosis codes

Provide Service

N o

Step3. Charge Capture and Charge Entry

Service CaptureOutpatient • Outpatient charge report • Medical Transcripts

* Time of service payments are for patients who do not have insurance and pay upfront at the time of availing medical services

A Ye s

Step4. Claims Process Review • Compare with provider schedule/contract with the payer • Missing charge reports • Hospital reports and logs • Audit coding to documentation

Generate and Submit Claim • Electronic or manual

Charge Entry • At site or central billing office • Daily recap balance

Source: RCMS Presentation, SGS Analytics

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Revenue Cycle Management from a provider perspective (2/3) Step 6&8. Follow-up and Collections Transmit/mail claim

• Electronic claim submission • Paper claim mailing

Print Confirmation Report

Account Up and Collections

• Claims, USD amount • Accepted, Yes/No

Step 7. Denial Management

• Reviews Outstanding A/R • Research/Review • Request Additional Information, if any • Resubmit/update claim

Claim Paid ? Ye s

Open Mail • Prepare Batch • Endorse Checks • Prepare Deposit

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Revenue Cycle Management from a provider perspective (3/3) Step 8. Payment Posting Payment Posting

• Post Batch • Prepare Secondary Claims • Flag Appeals, Rejections, Refunds • Balance Batch

Payment Accurate ?

Ye s

End

Research / Review • Call Provider Relations • Follow Instructions for Appeal • Continue to follow Account

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Survey amongst leading healthcare providers paints an encouraging story for RCM outsourcing going forward Key Reasons why financial performance is below expectation

How are providers planning to respond from Medicaid cuts and government pricing pressures

Weaker than expected admissions/visits Weaker than expected pure pricing Weaker than expected pure payor mix Weaker than expected acuity mix Higher SWB costs

Trigger for optimization outsourcing

Higher supplies cost

Increase Service Offerings 17% Cost Shift to managed care 8%

Cut Service Lines 18% Other 1%

Higher bad debt expense Higher other operating expense Other 0 #1 Reason

#2 Reason

#3 Reason

Expenditure on IT expected to remain robust in 2012 Calendar 2012E

21.5%

23.8%

12.0% 12.5%

27.5%

2.7%

Calendar 2011E

22.9%

22.6%

11.5% 12.1%

27.7%

3.1%

Calendar 2010

22.9%

20%

23.9%

40%

Cut Expenses 56%

56% believe they need to cut expenses

12.7% 13.2%

60%

23.5%

80%

What cost lines are expected to be cut

Supplies 40%

Other operating expenses 15% Bad debt 2%

3.8%

None of the above 3%

100%

Building maintenance Replacement of existing medical equipment Expansion of facility Addition of new medical euipment to add a new service line Information technology Other

40% believe labor cost needs to be brought down

Labor 40%

Source: Credit Suisse Quarterly Hospital Survey, 4Q11

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In sum, following are the key drivers of outsourcing of Revenue Cycle Management The following factors present a unique opportunity for healthcare outsourcing: 

A likely increase of approximately 32 million people due to insurance coverage. This will mean increased registration, process documentation and claims



The mandatory implementation of electronic records will involve technological changes and this can be handled cost-effectively through outsourcing



The medical coding industry in the U.S. currently uses ICD-9 (an International Coding System that enables providers to code specific diagnoses). Most countries have already converted to ICD-10. Regulation in the U.S. is expected to change from ICD-9 to ICD-10 only in October 2013. Outsourcing will help companies to better adapt to the upgrade



With an aging demographic and more people availing healthcare benefits, there is a scarcity of domain knowledge experts in health insurance. Outsourcing firms have invested in this area and have the required talent pool.



The U.S. healthcare system is one of the most expensive in the world and outsourcing can result in a cost advantage due to transaction volume.



The healthcare industry spends an estimated $150 billion on an average per year on revenue and payment activities. A complex and fragmented industry has emerged from healthcare providers’ need to better manage revenues and meet regulatory guidelines while concentrating on their core functions of providing healthcare.

Source: SGS Analytics, Press Releases

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There is a strong rationale for investing in RCM solution offering companies (1/2)

Strong Industry Macroeconomic Fundamentals • RCM firms are expected to continue to benefit from complementary HCIT demand drivers such as ARRA funding, ICD-10 conversion requirements, increasing reimbursement scrutiny from both government and commercial plans, historical under-investment in hospital IT systems, political pressure to reduce healthcare costs and financial pressures on hospitals • As healthcare providers continue to face the greater complexity and lower reimbursements, hospitals and physicians will increasingly look to RCM companies as a means to lower costs and improve cash flow. The convergence of economic stimulus, unfunded government mandates, political activism and incumbent system inadequacy has created an impetus for HCIT investment. As healthcare providers make infrastructure investments and adopt more advanced HCIT systems, RCM firms stand to benefit from peripheral infrastructure investment

Attractive Business Model De-risks Investing in RCM Companies • RCM firms typically have transaction-based contracts, providing them with recurring revenue streams and high revenue visibility. Given the transaction-based nature of their contracts, RCM companies have limited exposure to broader economic cycles typically influenced by factors such as consumer and business spending, credit terms, interest rates and financial markets • The service-oriented nature of the RCM model can lend itself to the use of offshoring, which has grown in use and acceptance in recent years after initial resistance. Offshoring is expected to become an even greater factor in RCM firms in the coming years, substantially reducing costs

End-to-End solution Providers are Taking Market Share • Larger RCM players are expanding their product portfolios through internal product development, strategic partnerships and selective acquisitions. Integrated providers realize that attracting new customers and further penetrating existing customers requires a comprehensive suite of products • End-to-end solutions provide more complete patient information and reduce inefficiencies. Once “one-stop-shop” providers establish a toehold within a healthcare provider’s HCIT infrastructure, the displacement of single-point solutions providers is highly likely • Additionally, as healthcare providers face potential consolidation resulting from financial pressures, it is expected that single-point solution may become further disadvantaged to full-service providers Source: Duff & Phelps, SGS Analytics

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There is a strong rationale for investing in RCM solution offering companies (2/2)

Labor vs. Technology Arbitrage • Revenue cycle management activities involve expensive, labor-intensive processes, from eligibility verification, to medical coding, to billings and collections. Political and financial pressures call for widespread reduction of costs and inefficiencies in the healthcare system • Payers and providers seek to use a combination of technology and outsourcing to automate and simplify administration, lower costs and reduce errors. Technology arbitrage includes technology-enabled procedures such as voice recognition software that automates manual processes. Automation results in a permanent shift from labor to capital and significantly reduces variable costs for healthcare providers. This benefit is balanced with upfront fixed costs and data integrity concerns involved with emerging technologies • Labor arbitrage, on the other hand, involves the use of lower-cost, offsite (and frequently offshore) labor in lieu of onsite hospital staff in the revenue cycle process. Offshoring involves a smaller fixed investment, using an offshore Business Process Optimization specializing in RCM procedures such as eligibility verification, transcription, coding review, receivables follow-up, et al • Offshoring can be viewed a lower-cost version of the incumbent manual system, and therefore may be a less radical change than emerging technologies. Patient health information confidentiality and the stigma of offshoring are potential obstacles for the labor arbitrage model; however, our discussions with industry participants indicate that these concerns ease as the business case becomes more compelling

Source: Duff & Phelps, SGS Analytics

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However, RCM Industry has its own set of Challenges Vendor Consolidation • Winning new accounts and maintaining old ones will present challenges for many RCM firms • The largest challenge may be the preference of hospitals and providers to reduce the number of vendors with whom they deal. Until recently, the industry was largely populated by niche players offering single point services in the RCM value chain • Few, if any, RCM firms offered a complete product array capable of meeting end-to-end needs more effectively than the incumbent systems • RCM consolidation has resulted in more provider accounts being held by larger firms offering a full suite of services • Indeed, according to the June 9, 2010 press release announcing the $1.3 billion merger of Allscripts (NASDAQ:MDRX) and Eclipsys (NASDAQ:ECLP) “...the combined company will offer a single platform of clinical, financial, connectivity and information solutions” • As a result of consolidation, large players such as Emdeon, Intermedix and Ingenix have emerged with significant competitive advantages over niche players

Capital Requirements • Unfunded government mandates, while offering significant opportunities for RCM companies, require capital investment for product development and upgrades • The shift to ICD-10, severity adjusted DRG and HIPPA 5010 involve product reengineering and/or require new product investments for smaller firms, which may be more limited in their access to capital

Larger firms take the pie • Cross-selling efforts by larger firms threaten to displace smaller firms that offer niche RCM solutions. Product proliferation in recent years has exacerbated this customer risk for smaller firms, which has resulted in more integrated products • Network benefits also favor larger RCM companies with client accounts at both payers and providers • RCM firms with larger networks generate a more standardized workflow and information exchange between payers and providers. • As the healthcare system becomes more automated, and as more scrutiny is placed upon reimbursements, established players such as Emdeon (with a network of approximately 500,000 providers, 1,200 payers, 5,000 hospitals, 81,000 dentists and 55,000 pharmacies) are likely to benefit from this operating advantage and considerable barrier to entry • RCM players that may be positioned to benefit the most are those with critical mass, sufficient capitalization, an established track record and a full suite of integrated products • These scale benefits, combined with today’s restrictive capital market conditions, may make go-it-alone strategies more difficult to execute for small and mid-sized RCM players Source: Duff & Phelps

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Based on survey outcome, Mckesson is a market leader in RCM systems, followed by Cerner

Which Vendor Supplies current RCM system

Greenway 2%

I don't currently have an RCM system but might invest on the following one in the next two years 19%

Emdeon 1% eClinicalWorks 11% NextGen 1% GE Healthcare 2% Epic 9% Cerner 10%

McKesson 29%

I don't currently have an RCM system and do not plan on investing in one Allscripts in the next two 9% years 7%

Split expected to be spent on HCIT initiatives

Revenue Cycle Management 18%

Connectivity/Rel ay Systems 15%

Other 3% EHR/EMR ImplĂŠmentation services (consultants) 18%

EHR/EMR System 46%

Source: Credit Suisse Quarterly Hospital Survey, 4Q11

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End of Presentation