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An increasing issue within the health care field is the inability to collect debt from the growing population of uninsured or underinsured patients. Healthcare organizations may be struggling to meet operational margins because the industry has never treated its customers like other retail-oriented sectors of the economy. A McKinsy and Company report states that hospitals incur sixty billion dollars in bad debt annually because they typically collect only ten to twenty percent of a total uninsured patient balance after service. MacKenzie, 2009) This is due to a number of reasons, including poor accounting practices or a lack of patient information. This paper will discuss how one hospital, California’s Sutter Health, has taken steps to correct this issue. It will analyze the accounting practices put into place by Sutter Health and the success of this practice. This author will also provide an alternate solution to the issue of debt collection for self-pay patients as well as an opinion concerning the actions taken by Sutter Health. First it is important to provide background information pertaining to California’s Sutter Health Hospitals.
Sutter Health is a non-profit network of community-based healthcare providers. This organization provides care to more than one hundred Northern California communities. (Souza & McCarty, 2007) Sutter Health is composed of hospitals, physician organizations and other health care service providers that share resources and expertise to advance health care quality. While the variety of providers is beneficial to the communities served, it posed an operating issue for the organization. (Hummel, 2004) One of the key problems that Sutter Health was experiencing was that each facility acted as an independent “island” of information.
Due to the numerous operating and accounting systems it was impossible to obtain data and reports in the same format from every location. There were no common practices within the organization. (Hummel, 2004) Each facility followed different admitting and billing procedures. This resulted in a few facilities having accounts receivable days in the range of one hundred twenty, while others had fewer than sixty days. The lack of standardized revenue collection and integrated management reporting tools was adversely affecting the financial performance of Sutter Health. Hummel, 2004) In 2003, during their effort to standardize the operating systems, Sutter Health performed an analysis of the organizations revenue management cycle. The analysis results proved that Sutter’s current information systems were costly to maintain and did not provide the real time information that was needed. (Anonymous, 2005) The analysis provided Sutter with information that was valuable in determining key issues that were affecting their ability to collect debt and lower the facilities account receivable days.
Most of the issues arose from the inability to access real time information which in turn affected the actual methods of collection that were being employed. The lack of real time information greatly hindered Sutter Health’s ability to collect debt from patients once a service had been provided. Since the needed information was not immediately available, managers had to wait until the end of the month to set benchmarks, track progress, or make decisions. This delay in information prevented account representatives from being able to prioritize and effectively work on their cases. Souza & McCarty, 2007) This had a negative impact on the number of receivable days that each facility incurred. Due to the lack of information, Sutter Health had difficulty collecting on patient accounts. Sutter’s collection method focused on the back end staff- the central business office and collectors- rather than the front-end staff member to collect payments. (Souza & McCarty, 2007) Patients were not being asked for their payment in a timely manner. Important information, such as the patient’s portion of responsibility and the verification of the insurer’s responsibility, was delayed due to the systems that were in place.
Once the account representatives were provided with the information they needed patients had already received care and been released. It became more challenging to collect debt after a significant amount of time had passed between the date of service and the date of collection attempt. Reimbursement is reduced by forty percent post-service. (Anonymous, 2010) This resulted in an increase of account receivable days. After examining the information obtained from the analysis and realizing the importance of standardization throughout the organization, Sutter developed a solution that best fit their current situation.
First on the agenda was to develop a standardized system within the entire Sutter Health organization. The organization chose a program based on the criteria that the program met or exceeded existing functionality, be easy to use, be cost effective and represent advanced and/or adaptive technology. (Anonymous, 2005) Sutter Health chose to use the MedSeries4 (MS4) throughout all of their facilities. This program has helped to standardize the organization’s patient accounting processes.
The staff of Sutter Health is now able to prioritize and follow up on financial counseling, third-party payer billing and collection activities through an automated collection system. This system also has the capability of producing daily work list based on manager-defined account receivable criteria. Each facility is able to track accounts from the moment of pre-admittance through the time of potential assignment with an outside collection agency. (Hummel, 2004) This has also resulted in the facilities being able to provide data and reports in the same format. Another aspect of Sutter’s solution was to alter their collection method.
Rather than focusing on back-end collection, Sutter made the choice to switch focus to the front-end collections. This meant that the staff of the Sutter Health organization must begin to request payments at the time of service rather than after the service had been provided. Since the front-end staff, such as the registration personnel, was not familiar with asking for payments up front, Sutter provided comprehensive training including effective patient communication. (Souza & McCarty, 2007) Sutter also provide the staff with effective tools, such as work list, progress trackers, reports on accounts receivable days, and performance rankings.
These tools assist the staff in working on the most valuable accounts as well as provide encouragement to tackle those accounts. Switching the focus to front-end collecting also meant ensuring that patient information was accurate. (Souza & McCarty, 2007) Sutter began analyzing each registration by a rules engine before the patient left the registration desk. This helps to identify any potential problems, such as who has financial responsibility for the account. Once the information has been analyzed, the registration staff is prompted to gather more information or payment. Souza & McCarty, 2007) Sutter’s front-end collection method also uses CarePricer. This service provides patients with an accurate estimate of their out-of-pocket expense. This allows Sutter Health to educate its patients of their responsibilities upfront improving collections. (Anonymous, 2010) Ensuring that information is correct from the beginning has provided beneficial results within the Sutter Health organization. Within the first three months of implementing the above solutions, Sutter had an additional collection of seventy-eight million dollars. Sutter’s accounts receivable were reduced from sixty-five o fifty-nine. (Souza & McCarty, 2007) One hospital had triple-digit account receivable days but that number has now been reduced by fifty percent. The facilities are now saving four to six percent on uncollected accounts. (Hummel, 2004) Another benefit of implementing the solutions is staff satisfaction. A recent survey confirmed that the staff felt that the program was effective and encouraging. This resulted in renewed sense of ownership and competitive spirit. (Souza & McCarty, 2007) In order to closely examine the effectiveness of their collection methods, Sutter Health may have used horizontal analysis.
Horizontal analysis is the examination of the performance of individual financial statement items over several accounting periods. (Edmonds et al. , 2010, p. 325) This analysis would have allowed Sutter to determine whether or not their account receivable days were increasing or decreasing over time. By comparing this information over several accounting periods, Sutter was able to accurately determine whether or not the collection methods were effective. It appears that Sutter Health may have defined their collection problem by the allowance method of accounting for uncollectible accounts.
This method allows an organization to report an estimate of the amount of receivable accounts that will not be collected. (Edmonds et al. , 2010, p. 172) Once horizontal analysis indicated that the account receivable days was increasing, Sutter could have used the average number of day to collect accounts receivable to determine how many days, on average, it takes the facilities to collect on accounts receivable. This may have led the organization to estimate the allowance for doubtful accounts by using the percent of revenue method. (Edmonds et al. , 2010, p. 77) This would have allowed Sutter Health to determine how much revenue would ultimately be lost. By doing this, Sutter was encouraged to alter the current methods of collection in order to ensure revenue. While Sutter Health was able to implement one solution that lowered their account receivable days, there are other effective solutions. One alternate solution is receivable segmentation. This method of collections determines different risk variables and requires third-party consumer credit and demographic data to accurately predict the behavior of self-pay patients.
Factors such as credit history, financial conditions, and eligibility are used by financial managers to understand or determine the financial risk that each account poses. (Boehler & Hansal, 2006) Receivables segmentation requires a hospital to identify groups of accounts that behave differently. This method is more effective if it is completed before collections. Each patient that is treated has a different ability and willingness to pay the health care bills that are incurred.
Receivables segmentation uses different factors such as a patient’s credit score, the patient’s historical payment activity, income, initial balance, co-pay/uninsured, marital status, and inpatient/outpatient status to determine their level of “collectability”. This results in the collection department being able to automatically estimate the likelihood of payment and segment patients into risk categories with different projected collection rates. (Boehler & Hansal, 2006) Segmentation shifts the focus of the collection department towards patients who are more likely or able to pay their debt.
This method of collection also quickly identifies patients who qualify for financial charity or public assistance. This lowers the cost of collection by eliminating cases that are eligible for other forms of financial assistance. In the end, this method allows hospitals to improve their operational efficiency while increasing their self-pay revenue. (Boehler & Hansal, 2006) Receivable segmentation allows health care providers to increase self-pay collections, decrease cost to collect, and improve self-pay account receivable days while ensuring that low-income patients receive the appropriate financial assistance. Boehler & Hansal, 2006) Like Sutter’s solution, this alternative solution also encourages patient education. Before costs are incurred it is important that patients fully understand their responsibility. When a patient arrives for a scheduled or unplanned hospital visit, an administrator should explain anticipated services, payment ability, and financial obligations and options. It is important that patient-focused billing is delivered. If numerous payment plan or convenient options are offered, patients may be more willing to pay. HFMA, 2010) In my opinion, the solution that Sutter Health implemented was an effective method of collecting debt and decreasing the accounts receivable days. By implementing a standardized system, Sutter enabled each facility to follow an organizational guideline. This ensured the each facility would be held accountable to the same standards. Also, each facility would be able to assist the organization as a whole in staying within budget and obtaining their short-term goals. I know as a patient, it benefits me to have the ability to have my medical information transferred etween healthcare providers rather than repeating the information to each. I feel that the front-end collections are the most effective solution in lowering the account receivable days and increasing the organizations revenue. According to Koeing, the collection of small balance co-pays at the time of service has enormous potential to increase cash flow, cut cost to collect and reduce bad debt. Once these small balances go unpaid at the POS, they become very challenging to collect at later stages of the revenue cycle. Koeing, 2010) Personally, I would rather pay at the time of service rather than wait for a bill to be sent. Medical bills occasionally get pushed to the side since they do not always affect an individual’s day-to-day living. By encouraging patients to pay up front, hospitals or health care providers are more likely to receive at least a portion of the debt. Koeing also provides this example; the potential impact of collecting just fifty twenty dollar co-pays a day would yield an increase in cash flow of $365,000 a year, plus a substantial decrease in statement generation costs and potential bad debt. Koeing, 2010) While taking my son to the emergency room, I have witnessed twenty to fifty patients being treated throughout our visit. Based on the example above, the hospital could have drastically lowered their accounts receivable days by requesting co-payments before the patients were discharged. From a patient’s perspective, Sutter’s solution of up front collections along with their ability to provide an accurate estimate the patient’s financial responsibility encourages patients to full-fill their financial obligations.
Ninety-seven percent of hospitals surveyed in the Healthcare Financial Management Association (HFMA) 2009 study, “The Changing Face of Self-Payment in Hospitals,” have experienced an increase in self-pay accounts receivable compared with the prior fiscal year. In nearly thirty-three percent of respondent hospitals, receivables are growing faster than patient revenue. (Koeing, 2010) Sutter Health took the necessary steps to reduce their number account receivable days. By standardizing their operational systems throughout the organization, Sutter was able ensure that each facility was able to provide and access data in an equivalent format.
Sutter also implemented a front-end collection method. This helped to lower the account receivable days as well as increase the revenue of the organization. While I believe that Sutter adapted the most effective solution, there are other alternative to addressing the same issue. One alternative is receivable segmentation. This method instructs hospitals to determine a patient’s likeliness to pay their debt. The patients “collectability” status is based on several factors, including credit and income.
Receivable segmentation provides healthcare providers with the opportunity to increase self-pay collections, decrease cost to collect, and improve self-pay account receivable days. Despite which method health care organizations use, it seems as though any measures taken may reduce uncollectable accounts and increase revenue. References Anonymous. (2005, October 19). Sutter Health Selects EPSi’s Solutions to Achieve System-wide Cost Standards and Performance Management [electronic version]. PR Newswire,1. Retrieved July 29, 2010, from ProQuest Database (Document ID: 913887581). Anonymous. 2010, June 05). MedAssets; Sutter Health Selects MedAssets Patient Bill Estimation Solution to Improve Collections and Help Consumers Understand Their Out-of-pocket Cost. Retrieved August 04, 2010, from ProQuest Database. Boehler, A. & Hansal, J. (2006, January 01). Innovative strategies for self-pay segmentation [electronic version]. Healthcare Financial Management. Retrieved July 29, 2010, from http://www. allbusiness. com/banking-finance/banking-lending-credit/10579823-1. html. Edmonds, T. , Olds, P. , McNair, F. , & Tsay, B. (2010). Survey of Accounting (2nd ed. ). New York: McGraw-Hill Irwin.
Healthcare Financial Management Association (HFMA). (2010). Managing the Self-Pay Cycle. Retrieved July 29, 2010, from http://www. emdeon. com/eNewsletters/Compass/Spring10/Managing%20the%20Self%20Pay%20Cycle%20HFM%20March%202010. pdf. Hummel, J. (2004). Financial Finesse [electronic version]. Health Management Technology, 25(2), 52-55. Retrieved July 29, 2010, from ProQuest Database (Document ID 538867911). Koeing, S. (2010, March 29). Five Strategies for Strategic Debt Recovery of Self-Pay Patient Accounts. Retrieved July 30, 2010, from http://www. healthleadersmedia. com/content/FIN-248700/Five-Strategies-for-Stra