Key Performance Indicators (KPIs) within the healthcare revenue cycle play a vital role in monitoring financial well-being and optimizing revenue capture for providers. Understanding these metrics is crucial for healthcare organizations aiming to sustain access to high-quality, cost-effective care—an essential aspect of the evolving landscape of value-based care and healthcare consumerism. These KPIs offer critical insights and avenues for enhancing performance.
Across the spectrum of healthcare organizations, financial performance faces challenges from multiple fronts. Factors such as escalating labor costs, shortages in the workforce, and declining patient volumes have significantly narrowed profit margins. Concurrently, hospitals have reported heightened levels of bad debt and charity care compared to previous years.
Physician practices, hospitals, integrated health systems, and other entities are actively engaged in refining performance within the healthcare revenue cycle to improve both financial and clinical outcomes. The utilization of KPIs linked to pivotal tasks within the revenue cycle is instrumental in gauging financial health and pinpointing areas necessitating improvement.
A notable approach to discerning the top five healthcare revenue cycle KPIs involves the Healthcare Financial Management Association’s (HFMA’s) MAP Keys, which serve as benchmarks for excellence in the healthcare industry’s revenue cycle. Understanding the commonly tracked KPIs, the methodologies for establishing them, and the requisite data sources to monitor performance are central facets for providers seeking to optimize their revenue cycle.
Duration of Net Accounts Receivable
The KPI focusing on net days in accounts receivable (A/R) stands as a barometer of efficiency within the revenue cycle. According to HFMA, providers compute this KPI by dividing the net A/R by the average daily net patient service revenue. This metric holds substantial importance in financial management.
HFMA outlines that essential data for this KPI can be sourced from the balance sheet, encompassing elements such as the net of credit balances, allowances for uncollectible accounts, charity care discounts, and contractual allowances for third-party payers.
The requisite data for this calculation involves specific components:
• A/R outsourced to a third-party company not categorized as bad debt
• Medicare Disproportionate Share Hospital (DSH) payments
• Medicare Indirect Medical Education (IME) paid on an MS-DRG account basis
• A/R linked to patient-specific third-party settlements, wherein a “patient-specific settlement” denotes a payment attributed to an individual patient account
• Critical Access Hospital (CAH) payments and settlements
However, exclusions are necessary for non-patient A/R, 340B drug purchasing program revenue (unless recognized as a patient receivable in the accounting system), and capitation and premium revenue related to value- or risk-based contracts.
Furthermore, providers should omit non-patient-specific third-party settlements, like DSH, CRNA, and Direct Graduate Medical Education (DGME) payments, as well as certain cost report settlements that do not directly relate to individual patient accounts.
HFMA also specifies exclusions for hospital-reported data, such as state or county subsidies, ambulance services, certain assessments, retail pharmacy, post-acute services, and physician practices or clinics unless they hold Medicare-recognized, provider-based status.
Determining the average daily net patient service revenue involves examining the most recent three-month daily average from the organization’s income statement. This value encompasses gross patient service revenue minus contractual allowances, charity care, and doubtful accounts. It’s important to note that this average doesn’t typically appear on audited income statements.
This computation includes Medicare DSH payments and Medicare IME paid on an MS-DRG basis but excludes the same financial data as net A/R.
The higher the net days in A/R, the more turbulent the revenue cycle. The American Academy of Family Physicians (AAFP) suggests keeping days in A/R below 50 days at a minimum, with 30 to 40 days being a more favorable range.
2. Expense of Collection
Another crucial metric in financial management is the cost-to-collect ratio, a key performance indicator highlighting operational efficiency and productivity within revenue cycle processes, as explained by HFMA. This metric, derived by dividing the total revenue cycle cost, reflected in the income statement, by the total cash collected from patient services on the balance sheet, signifies the efficiency and effectiveness of revenue-related operations.
HFMA specifies that revenue cycle costs encompass:
• Expenses linked to patient access (e.g., eligibility verification, insurance validation, centralized scheduling, pre-registration, admissions/registration, authorization/pre-certification, financial clearance, Medicaid eligibility, and financial counseling)
• Patient accounting costs (e.g., billing, collections, denials, customer service, subscription fees, collection agency fees, charge description master/revenue integrity, cash application, and payment variances)
• Health information management expenses (e.g., transcription, coding, clinical documentation improvement, chart completion, and imaging)
These costs, according to HFMA, should be reported along with respective functional area costs, including salaries and fringe benefits, subscription fees, outsourced arrangements, purchased services, software maintenance fees, bolt-on application costs, associated support staff, IT operational expenses related to revenue cycles, record storage, contingency fees, and transaction fees.
Excluded from the computation of revenue cycle costs are “hard” IT expenses like licensing fees, servers, hardware, and corresponding full-time equivalent (FTE) support, as well as lease and renting expenses, physical space costs, and scheduling if performed within service departments.
Regarding total patient service cash collected, this figure should comprise all payments posted to patient accounts for services rendered, including undistributed payments, bad debt recoveries, Medicare DSH payments, and Medicare IME payments. However, it excludes patient-related payments and settlements like capitation, DGME, Medicaid DSH, along with specific reporting requirements for net days in A/R.
Industry benchmarks suggest that the standard cost-to-collect ratio typically ranges between 2 to 4 percent of net patient revenue, as indicated by various sources.
3. Clean Claim Rate:
Ensuring a high clean claim rate is crucial for healthcare organizations due to the significant impact of claim denials on both finances and operations. According to HFMA, this metric, derived from claims data, serves as a key indicator of revenue cycle performance, reflecting the accuracy of collected and reported data.
The clean claim rate represents the percentage of claims that successfully pass edits without requiring manual intervention. This figure encompasses all claims accepted into the claims processing tool for billing, including primary, secondary, and tertiary claims or all relevant 837 types. However, claims flagged with warnings mandating intervention, claims directly submitted to third-party payers, and those “warned” for print and hardcopy submission are excluded from this metric.
Providers calculate the clean claim rate by dividing the number of claims accepted into the billing tool before submission by the total claims, including primary, secondary, and tertiary ones, as well as those “warned” requiring intervention other than printing. Nonetheless, this calculation excludes direct submissions to third-party payers and “warned” claims specifically for print and hardcopy submission.
A high clean claim rate is vital for reducing claim denials and identifying areas for enhancement in claims management. It serves as an indicator of potential issues in patient data collection, timely claim submission, and coding accuracy within the revenue cycle.
Healthcare organizations are encouraged to target a clean claim rate of 90 percent or higher, with some industry sources advocating for a standard of 95 percent. Achieving and maintaining such rates is fundamental for efficient revenue cycle management and minimizing financial losses associated with claim denials.
4. Unrecoverable Debt
Healthcare organizations encounter bad debt when they’re unable to secure payment for the care they provide. Comparatively higher levels of bad debt have emerged due to shifts in insurance dynamics, such as the rollback of Medicaid continuous enrollment flexibilities. Providers are witnessing an increase in bad debt as patients bear a greater burden of out-of-pocket expenses for medical services.
HFMA recommends using an account resolution KPI to gauge an organization’s bad debt status, which serves as an indicative measure of collection efficiency and financial counseling trends. By dividing the bad debt by the gross patient service revenue, providers can gain insights into their ability to collect accounts and pinpoint payer sources contributing to revenue loss.
This KPI offers a relatively straightforward assessment compared to other commonly tracked metrics, as both bad debt and gross patient service revenue are typically outlined in an organization’s income statement. However, HFMA clarifies that bad debt represents the total deduction displayed on the income statement for the reporting period and doesn’t refer to the amount written off from accounts receivable. It might also be labeled as “Provision for Uncollectible Accounts” or “Provision for Bad Debt,” according to HFMA’s guidelines.
Acceptable levels of bad debt vary based on the type of organization, with hospitals typically reporting higher levels compared to physician practices. The tendency for patients to seek care at hospitals or emergency departments when uninsured or underinsured contributes to this trend. Nonetheless, every organization should aim to minimize bad debt to prevent revenue loss and mitigate potential financial leakage.
5. Percentage of Net Patient Service Revenue Collected in Cash
A key performance indicator (KPI) that evaluates cash collection as a percentage of net patient services revenue serves as a crucial measure to gauge an organization’s financial well-being by assessing its revenue cycle’s efficiency in converting revenue to cash.
This financial management KPI involves dividing the total cash collected from patient services by the average monthly net patient service revenue statement, offering valuable insights into an organization’s fiscal robustness.
The total collected patient service cash encompasses monthly revenue from patient service payments posted to patient accounts, including undistributed payments, bad debt recoveries, Medicare DSH reimbursements, and Medicare IME payments. HFMA specifies that this value is net refunds.
However, provider organizations need to exclude certain portions of the total collected patient service cash, such as remittances not yet deposited in the bank, non-patient-related settlements or payments, and non-patient cash (e.g., proceeds from retail pharmacy, gift store, and cafeteria).
Additionally, specific reporting requirements apply depending on the type of organization and the data being reported. For instance, hospitals reporting data should exclude state or county subsidies, ambulance services, tax and match-type assessments, retail pharmacy, post-acute and ambulatory services, and physician practices or clinics unless they are Medicare-recognized provider-based status clinics.
If organizations report ambulatory data, exclusions extend to state or county subsidies, tax and match-type assessments, post-acute care services, hospital services, and Medicare-recognized provider-based clinics within hospital-reported data.
Finally, organizations reporting post-acute care data should exclude patient cash collected for ambulance, hospital, and ambulatory services.
Ideally, the KPI should approach 100 percent to ensure robust financial health and integrity. However, values falling within the range of 90 to 95 percent might indicate potential revenue leakage, signaling the need for further investigation.
Beginning with fundamental healthcare revenue cycle performance KPIs can serve as a catalyst for an organization’s journey toward financial prosperity. These five KPIs offer a comprehensive view of an organization’s financial well-being, aiding leaders in pinpointing potential revenue leakages.
Subsequently, organizations should adopt a deliberate approach in selecting additional revenue cycle KPIs to monitor financial health. HFMA’s MAP Keys have evolved, now comprising 29 KPIs tailored for various entities like hospitals and systems, ambulatory providers, physician organizations, post-acute care, and integrated delivery systems. Depending on their improvement goals—be it reducing denial rates, enhancing point-of-service cash collections, or targeting aged accounts receivable by payer—organizations can select KPIs spanning patient access, pre-billing, claims, account resolution, and financial management categories.
Irrespective of the chosen KPIs, consistency in tracking is imperative for providers to discern trends. Utilizing this information allows for comparisons of performance against industry peers, enabling the identification of additional areas for improvement and strategies to attain a competitive edge.