As patient volumes and revenues begin returning to prepandemic levels, health system executives, including revenue cycle leaders, are looking for further opportunities to optimize margins—particularly by reducing expenses.
But expense reduction isn’t the only way to maximize operating margins. Rather, making prudent investment decisions supported by solid return-on-investment (ROI) analyses is the best way to increase margins and generate funding for broader near- and long-term strategic goals. For revenue cycle, the key to maximizing ROI lies in finding the cost-to-collect sweet spot—where investments and expenses are in balance.
What Is Cost-to-Collect?
Cost-to-collect is defined as total revenue cycle cost divided by total cash collected.
Total cash collected is straightforward enough—insurance and patient payments plus bad debt recoveries. But which expense items should be considered as the revenue cycle cost?
Core expenses that should be included in the cost-to-collect calculations are labor expenses (salaries and wages, including benefits) for the areas of patient access, patient accounting, and health information management (HIM). IT and overhead costs may or may not be included in the calculations.
Note: For physician enterprises, patient access costs are not
included; these costs are typically included in clinical operations.
While industry-wide survey information on cost-to-collect varies, currently available literature suggests the median cost-to-collect is 3%. Organizations may break down the cost-to-collect metric further by functional area to be able to pinpoint which expense items contribute most to cost-to-collect.
Reducing Cost-to-Collect
Once you identify your cost-to-collect, organize an effort to decrease it. First, look for opportunities to directly impact the denominator (cash collected) via classic revenue cycle performance improvement activities such as the following:
- Analyze trends in billing errors and denials: Billing errors and denials usually point to upstream process breakdowns happening in patient access, case management, and/or HIM. Start by addressing the trends that impact the larger amount of A/R.
- Prioritize aged, high-dollar A/R: This is one of the most effective ways to decrease A/R and improve cash collections. Often it requires overtime or additional temporary resources to drive meaningful changes in A/R backlogs.
- Improve staff productivity and work quality: Before adding more staff to handle ever-increasing A/R, ensure robust productivity and work quality standards are in place. For revenue cycle functions that are outsourced, this includes holding vendors to the same internal productivity and quality standards. In addition, if your organization has adopted a remote workforce, you may need to establish a baseline work-from-home infrastructure emphasizing robust communication in order to improve overall productivity and work quality.
Changing the numerator (revenue cycle expenses) of the cost-to-collect measure is trickier, since expense reductions can jeopardize overall production and cash collections if not done carefully. In other words, increased investments may not always drive increased revenues . The rule of thumb is to always emphasize collections when balancing against expenses. If expenses become overweight, intervention is required to increase the operational effectiveness to reduce the cost without sacrificing outputs. The balance of collections against expenses should always lean toward collections (see figure 1).
The following tactics may be used to increase or decrease expenses in the interest of improving ROI:
- Ensure staffing levels match work volume:
- Conduct staffing analysis for each of the revenue cycle functional areas (e.g., patient access, coding, HIM, billing, follow-up, cash posting). Work volume should be based on the recent historical data, and staff productivity based on the industry benchmarks.
- Consider outsourcing a larger part of your revenue cycle operations if challenges to recruit and retain staff are significant and/or if the overall costs to outsource are lower. Outsourcing decisions are complicated, and factors other than expenses should also be considered. Hybrid outsourcing arrangements that include a mix of technology and operational support, or “co-sourced” arrangements, are becoming more common.
- Assess ROI of existing vendors and renegotiate pricing:After identifying all revenue cycle–related vendors and software, estimate their ROI to determine whether the benefit is worth the cost. It is not uncommon to improve performance by identifying underutilized contracts that can be renegotiated or terminated.
- Consider deploying new technology to replace manual processes: As many organizations convert to new EHR and patient accounting platforms, adding or enhancing a new module or software (e.g., AI/RPA) can significantly enhance staff productivity and/or work quality. Any investment in additional technologies should always be weighed against the projected improvement from their activation. This can be achieved through risk-based arrangements with solution vendors to ensure the “juice is worth the squeeze.”
Note: The balance of collections against expenses should always lean toward collections. If expenses become overweight, intervention is required to ensure cost-effectiveness.
Balancing Cost-to-Collect with Revenue Cycle Performance
Staffing optimization, outsourcing, and new technology can improve cash collections, but there is a law of diminishing returns. Every organization aiming to improve its financial bottom line should maintain a balance between investing for more collections and controlling cost. This is done by viewing every major revenue cycle investment decision through the lens of cost-to-collect.
Figure 2 illustrates what it means to maximize ROI through cost-to-collect optimization. It is important to understand not only the trajectory of the ROI curve, but also the impact of shifting the curve itself.
- Adding staff, for example, puts an organization at a higher-cost, higher-collections coordinate on the existing ROI curve. In this scenario, the point of negative return is eventually reached as more costs (e.g., staffing) are added.
- Deploying efficiency-improving strategies, however, such as productivity improvement, AI/RPA deployment, and vendor contract renegotiation (for a better price per dollar collected), shifts the ROI curve higher. This is especially true when these strategies are assessed through the lens of expected ROI and the resulting impact on cost-to-collect. This in turn allows the point of negative return to be realized at a higher level of collections.
Organizations should focus on efficient allocation of existing resources and “ROI curve shifters” to ultimately drive bottom-line improvement.
Note: ROI represents improved collections as a function of additional staffing/expense.
Pushing Up the ROI Curve
Analyzing existing FTE allocations to determine where your organization lands on the ROI curve is a relatively simple and straightforward exercise. But investments or initiatives that push up the entire ROI curve, as illustrated in figure 2, are not so easily identified or implemented, as they are often new to the organization. For example, driving enterprise-wide productivity improvement, initiating third-party artificial intelligence solutions, or managing vendor contracts require carefully constructed work plans, multidepartment collaborations, and comprehensive performance monitoring. When executed properly, however, these activities can shift the ROI curve in a way that unlocks organizational potential.
Published August 11, 2021