In this episode, we’re pleased to welcome Michael J. McLafferty, CEO and Founder at MJM Advisory and Educational Services LLC, to discuss improving cash flow for physician organizations.
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Learn how to listen to The Hospital Finance Podcast® on your mobile device.Highlights of this episode include:
- Strategies that physician organizations should consider for increasing cash flow
- Key reports needed
- Net Collection Ratio versus the Gross Collection Ratio
- What is a good data source for physician benchmarking
- What are some ways to identify opportunities for improvement
- How to monitor the performance of the improvement opportunities
Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Michael J. McLafferty, healthcare thought leader and advocate who promotes improved access and benefits for patients and their physicians. He is the CEO and founder of MGM Advisory and Educational Services LLC. His professional credentials include a CPA with an MBA and three fellowship designations with the Healthcare Finance Management Association, the American College of Healthcare Executives, and the Medical Group Management Association. He’s a healthcare executive and consultant with more than 30 years of experience servicing major healthcare systems, clinically integrated networks, accountable care organizations, physician organizations, ambulatory surgery centers, healthcare joint ventures, and for-profit healthcare organizations. He’s currently chairing the New Jersey Healthcare Management Association’s Physician Practice Forum. He’s also the founder of the Educational Podcast, The Healthcare Maze. In this episode, we’re discussing improving cash flow for physician organizations. Welcome, and thanks for joining us, Michael.
Michael McLafferty: Thank you, Kelly. I’m happy to be here.
Kelly: Well, great. Well, let’s go ahead and jump in. So, what is a strategy that physician organizations should consider for increasing cash flow?
Michael: Well, what I’m going to outline here are a couple of steps, probably none of which individually your listeners haven’t heard of. But I think what I’ve found over the years is that by putting together a number of steps and approaching it that way versus doing one item or another, it gives you a much higher probability of finding some opportunities to improve cash flow. And I’ll start out with something that may seem blatantly obvious to a lot of your listeners, but I find when I’ve been retained to go in and help people improve their cash flow is something that I find that there’s not as much communication as you might think among team members in the revenue cycle. So it’s really important, whoever is overseeing this process, that they have a regular, could be as much as daily every other day, at least walking around and talking with these people and asking them not only, “How are things going?” But be more specific. “Are there any suggestions you have for improvement? Are there any concerns that you’re noticing?” And obviously, also having some scheduled approach, for cash flow and revenue cycle, I would assume, even for an organization doing well, having a team meeting at least once a week. And depending on how big the organization is, obviously, that can be done virtually.
But again, it’s important to stay in touch with everyone to understand before things potentially become an issue, what some of the concerns might be. And also, more importantly, suggestions that people have to make sure that you can constantly improve the process. As we all know, there are so many things changing in healthcare almost daily. It’s a real challenge to keep up with all these things going on. The second thing, everyone has their key reports to look at. And we’ll go into this in a little bit more detail shortly, but it’s really important to get comfortable with the standard set of reports that everyone’s looking at so that people are all looking at the same data. Third thing is, collection rates. I see a lot of people over the years who don’t really focus too much on what I call the Net Collection Rate. There’s a lot of Gross Collection Rate reviews. And again, we’ll get into more detail on this shortly. But taking the time to look at how well you’re collecting money from a net approach is very important to seeing where opportunities for improvement might be. The next item is something that’s become a lot easier over the years because of software improvements.
But it’s rare that I go into any setting and I ask people, “Can I see a copy of the workflow for the revenue cycle?” And what I’m looking for visually is step-by-step from the point where information is gathered at the front desk all the way through collecting on a claim. How does that work in your organization? There’s a lot of very cost-effective software out there now where individuals can take a little time, very intuitive also, very easy to work with. So, you can kind of map out step-by-step how things are working. And usually by doing a visual approach on top of data analytics, the combination of both, again, it becomes a little bit easier to see where improvements might be. At some point, you’ll identify some improvement opportunities. And we usually tell folks, once they have those opportunities, “Start with whatever we think is the highest rate of return with the lowest risk.” In other words, as you’re making whatever changes you have to make, it should be a fairly low risk, but a pretty good rate of returns. “Start with that part of the opportunities first.” And then lastly, which again, most people have heard this, this continuous monitoring, monthly, quarterly, and annual type reports. There are a lot of organizations nowadays that are literally getting data daily and looking at it. Again, as you’re looking at this data, even if it’s in some situations, daily or weekly, what’s really important there is what are you comparing it against.
And hopefully, you’re able to compare it against the previous year, previous month, so that you can get a sense of trending of how things are working. Again, that’s the overview of what the strategy would be a combination of better communication with your team, focusing on certain data analytics rather, setting up a work process visually so you can see exactly what the steps are. And then that should lead you to opportunities for improvement and then some sort of monitoring going forward to make sure not only that the improvements that went in place are working, but kind of give you a heads up going forward if there’s any problems.
Kelly: Those are some great ideas. Thank you for sharing those. What are some key reports needed for this review?
Michael: Well, I would think most people will focus on what’s referred to in the industry as charges, collections, and adjustment reports. And what I’ll say with those reports is a lot of times I see them broken down by individual provider and by payer. But a lot of times, I don’t see organizations breaking the adjustment reports down by category. And I think the category portion is important. And the reason I say that is that if we believe there’s an opportunity going forward when we look at rates, collection rates to improve collections based on some benchmarking, the first question people will ask usually is, “Okay. So, you’re saying there’s a 10% opportunity to improve our collections. Where is it?” And the answer, typically, is when you look at the adjustment reports broken out by category, you then can look at, well, which adjustments should we have been able to collect, and which adjustment categories do we have no opportunity to collect? And when you do that type of analysis, you start to find areas where things have been adjusted off. But in reality, you really should have collected, if not all of it, some of it anyway. And that then will allow you to backtrack and figure out what you can do differently to get those funds.
Accounts receivable aging is something that people obviously will always look at. And I always get questions about days in AR, which I’ll tell you, based on my experience, because of how some organizations make adjustments, it may not be as valuable as a lot of people think it is. I like to focus on days cash on hand to see historically where cash is and where it’s going. And the last thing has to do with budgeting. A lot of people talk about setting up a budget. But what’s important, what I’ve learned over the years, organizations actually on any side of the industry, but on the physician side especially, you really have to focus– if your book’s especially in a health system, are on the accrual basis, meaning cash and non-cash items are included in the analysis. You also have to make sure you have a separate set of budgets just on a cash basis. I’ve seen a lot of organizations over the years run out of cash or start to run out of cash. And it’s a surprise to them that they’re running out of cash because they never really track their cash separately. So again, these are the key things that we would typically focus on report-wise.
Kelly: That makes a lot of sense. Thank you for sharing those. And so what is the importance of using the Net Collection Ratio versus the Gross Collection Ratio?
Michael: Yeah, this is an area, again, where if you’re going to find some opportunities for additional cash, looking at the Net Collection Rate is where you’re going to typically find it as a starting point. So, the difference between the two are ratios in the numerator that are the same. It’s the number of collections for a period of time. So, they’re both similar that way. Where they’re different is that the Gross Collection Rate has the denominator, the full amount of gross charges. And as everybody in the industry knows, it’s not a very good benchmark because every organization out there has their own price schedule. We refer to it as standard fees. So, since everybody’s using their own set of prices or standard fees, you really can’t compare for benchmarking purposes, how you’re doing. So, I always suggest the Net Collection approach, which again has collections in the numerator. But in the denominator, you take your gross charges and you subtract from your gross charges anything you think you cannot collect. And again, this is where it gets back to that discussion we had about the adjustment report being set up by category. And so, anything, for instance, is always going to be just the normal difference between the standard fee and an approved rate, rather. And that adjustment most people will make initially for their net collection rate.
But based on past history, and certainly in the last five to seven years, there’s probably other money sitting there you can’t collect. And one perfect example is probably going to be out-of-pocket charges to patients. But each organization knows for itself, what are some of the other monies that they have billed out or sitting in AR that they’re going to probably have to adjust often and never collect. And what’s good about that is, once you get rid of the difference between everybody’s prices because you’re subtracting from your gross charges down to the approved rate, now it’s kind of more of an apples to apples, from one organization to another. And the benchmark best practices for using this Net Collection approach pretty much across all specialties is, you’re supposed to collect, once you figure out how much you can collect, anywhere from 92 to 95 cents or 95% rather of that number. Now, what we find when we take this approach, and we’ll be pretty conservative too when we work with people, if they’re not sure about exactly how much of something they can collect, the first time through with it, we’ll give them the benefit of doubt and subtract out as much as we can to get down to this number that they should collect.
And even when you do that, especially if you’ve not really done this in your organization or you haven’t done it in a while, let’s say. It’s not unusual the first time you calculate this. You’re only in the 70-75% range. You should be at least high 80s, low 90s, right? I mean, 90 to 95 is the benchmark. But can you get up to high 80s, low 90s even? So now you’re starting to talk about– at least when we go in most of the time, 10-15% increase of cash flow based on whatever that number is you should be able to collect. And again, even for small organizations, you’re usually talking hundreds of thousands of dollars that they’re leaving on the table yearly. And then, like I said, once you come up with this percentage differential, then you have to go back to the adjustment list that if you’ve never done it or you haven’t done it in a while, you break out by category. And you got to sit down and figure out– the organization’s in the best spot to figure this out. What are we adjusting off that we probably should be collecting? And why are we not collecting it? What protocols do we need to change? What resources do we need?
I find a lot on the physician side, when we go in and do this analysis, that they’re under-resourced. And what happened over time is the cash collections got poorer and poorer and poorer. And so, they just started cutting costs. And the biggest cost most healthcare organizations have is people. So, they keep cutting people. And then it turns out they get to a point they don’t have enough resources to go after from a collection standpoint. So again, I think if you focus more on net collection and less on gross collection, you’re going to be much better off for it.
Kelly: That makes a lot of sense. What is a good data source for physician benchmarking?
Michael: There are a few out there, but in my experience, I found that the Medical Group Management Association is my preferred source. And in the past, when I’ve looked at some of the size of their database, it’s typically been larger than other companies or advisory groups that are selling their data. The one really good thing is if you’re a physician organization and you become a member of MGMA as a practice, at some point during the year, you will be asked if you would like to participate in putting together the benchmarks for that year. If you participate and provide the data, which is provided, it’s de-identified, it’s provided in a confidential way. Then when the data comes out, the reports come out, you actually get the data for free. So, it’s a great deal because if you try to just buy the data and you’re not participating, it can be cost prohibitive.
So, we usually tell people, “You have to join this organization. It’s not that expensive to join it. And you get other benefits, too, besides this data. You can join and during the year even start providing data for your particular specialty. And they will send you information by region and nationally telling you, for example, if you’re a cardiology practice, well, ‘How are you doing compared to other cardiology practices in your region or nationally? How are you doing?'” On a whole range of everything from productivity to cash flow rather. So, it’s a great opportunity to plug into a national organization for the business side of physician practices. And at the same time, just by participating in the survey once a year, you end up getting a tremendous amount of data that will help you figure out where opportunities are for improvement.
Kelly: Sounds quite beneficial to do that. So why take the time to set up the workflow for your revenue cycle?
Michael: Yeah, this is something that I’ll go as far as to say over 90% of organizations we work with that don’t do this. Not that people in the revenue cycle, whatever their particular job is in the revenue cycle, don’t understand what they’re doing themselves. But one of the things you’ll find is that you need to develop a picture of the entire process. And again, just to refresh, I’m thinking from the point that a patient checks in and provides and confirms, I guess, if they’re not a completely new patient, their insurance information. And then they see the physician, whether it’s an in-office visit, or it’s a procedure, or unfortunately, they actually need more serious surgery. And then this claim gets developed with that information in it, and it goes out first through an interface out to the payers. At some point, it comes back paid or, worst case, it’s not approved for some reason, usually having to do with some data issues.
But my point is, you have to look at the whole process because if you only talk to a person or a couple of people in a part of the process, let’s say a good example would– and I’ve seen this happen many times. The folks at the back end of the process who are involved in actually helping submit the claim and trying to collect the money, they were always complaining that the people at the front desk, they don’t know what they’re doing. The people at the front desk always tell me that the people in the back office are harassing them [laughter]. And what’s really going on, though, is that both groups don’t really understand what they’re doing or how important certain information is to getting a claim out. And a lot of times, what I tell the people in the back office, which surprises them is, that from my experience, they’re the teachers to the people at the front desk for check-in and check-out. Because they see the issues with the claims in the back office, they need to have a good relationship with the people at the front desk and explain to them what information they need to either get that they’re not getting or what they need to do differently.
But again, if you have the entire process visual in front of you, when you have these types of discussions, you can look at it visually and figure out, “Well, what do we need to do differently? Do we need to add a step? Do we need to take a step out? Do we need to put in, what I call, a decision step? Where if certain, for example, if certain data’s there, it goes to the back office. If certain data isn’t there, it has to go back to the front desk. Maybe a call has to go out to the patient even, get more information.” But it’s very helpful for the team to see what everybody’s doing. And whenever we’ve taken the time to do these workflows, and we basically sit with each function separately, and then we get the whole team together, and we go through each team’s flow chart with everybody. And we use it as a teaching opportunity. Even just having those initial discussions, a lot of suggestions come out for improvement, or you hear things like, “Oh, now I know why we would never get paid by such and such.” Most organizations, though, I find, don’t take the time to do this. And it’s, again, years ago, I would say it was probably a very difficult thing to do. And the average person might have trouble doing these types of things. The software is expensive.
That’s not the case anymore. It’s pretty straightforward. And a lot of big organizations, especially health systems, they have people either already know how to do these workflows or certainly can provide some guidance. So, it’s important. The last point I’ll leave you with knowing the whole process. If somebody goes in, and this happens all the time with the right intention, somebody in the work process, let’s say the back office, for example, they see something that they think, “Oh, if I make this change, things are going to be better.” They may share their suggestion with somebody else. A lot of times, they don’t, and they start to make changes, which could be beneficial for the whole process or could create a problem somewhere else. And that’s why somebody has to be in charge of this entire process. And there should be a procedure in place that if anybody has a good idea who wants to make a change, whoever’s in charge of this entire process, I’ll call this person the process manager, has to review it and make sure that it’s beneficial for the whole process. Because as I said, a lot of times, it’s not. Things get changed at the front-end or the back-end that causes problems.
Again, people are doing this, in most cases, for the right reason. They’re trying to be helpful. But you need to look at the whole process. And this is something that we see happening a lot. So, in these cases, when a process manager gets put in place as part of working with somebody, things usually become more stable. And when changes get to take place going forward, everybody gets to see the change. And hopefully, if it’s an additional step or two, then you just update the workflow visually. So, the next team meeting, you can have the workflow, and you have a couple of new steps in a different color, different shade, whatever it is. And you can talk to everyone about why you’re making a change, why you’re doing this, and why you think it’s going to be beneficial, and get feedback from the team before changes are made.
Kelly: Yeah, I’m over here shaking my head at you, Michael. That makes a lot– that really makes a lot of sense. I completely agree with a lot of that. So, what are some ways to identify opportunities for improvement?
Michael: So, we’ve gone through a couple here, and I’ll just do a quick summary here. Obviously, looking at your reports, especially for trends. So, whatever your key reports are, you’re going to look for trends. And if, for whatever reason, things are trending in the wrong way, it gives you an opportunity to quickly look and identify what you need to do differently. We’ve talked about collection rates. Spend more time on Net Collection discussions than Gross Collection discussions. In addition to just having the difference between gross charges and the approved rate, take the time to look and see what other items you’re probably never going to collect that are outstanding. And then look at that benchmark of this low 90s initially and see where you are. And again, that will usually show you some opportunities. So, we’re using benchmarking here to some extent. We’re also making sure we get a report categorizing exactly all the adjustments. And so, we understand better which ones we could never collect, which ones we have an opportunity to collect. Flowcharting is definitely something there. And what should come out of all of this? And it’s not something that’s going to happen in one or two meetings. But as you develop this approach, you’ll eventually start to come up with some opportunities for improvement.
Kelly: Most definitely. So how should you monitor the performance of the improvement opportunities?
Michael: Well, once you have identified your opportunities, and let’s just say, for example, just for purposes of this discussion, that when you look a little bit closer at your net collection rates, they came out, let’s say, 80%. And you’ve got this opportunity for at least a 10% improvement. Your reports should start to show that your collections are going up. You’ve got the benchmarking from MGMA on the net collection side and there’s a lot more there too. When you look at the MGMA numbers, there’s a whole bunch of productivity benchmarks for your physicians, for your nurse practitioners. So, besides just looking at efficiencies and collecting better, “How productive are your people?” That’s more of feeding into the billing and the initial collections piece. So, performance benchmarks, in addition to financial benchmarks, are important. The process flow, we’ve talked about that’s just something, again, whenever you’re having your team meetings, if anybody believes it’s time to make a change for improvement purposes to the workflow, that needs to be something brought up in the meeting, put in front of everybody visually so that, again, the appropriate improvement can be made by the process manager and hopefully things can at that point get better.
And I think if you look at this at least monthly, quarterly, annually, from this more of a holistic approach of reports, collection rates, benchmarking, workflow, at least those four components, I think you’ll not only get a comfort level that the improvement opportunities that you’re implementing are making a difference. But on the other hand, if for whatever reason, there are some issues in your organization that are developing, using this multi-factor type approach, you’re going to see it sooner than later. And as we all know, the sooner you see a change in a trend that’s negative, the higher the probability you’re going to be able to collect it and change. Change it, get better collections, and improve your performance financially in the organization.
Kelly: Wow. Well, thank you so much for joining us today, Michael, and for sharing all these great insights on improving cash flow for physician organizations.
Michael: Thank you very much for having me on, Kelly.
Kelly: Yeah, and if a listener wants to learn more or contact you to discuss this topic further, how best can they do that?
Michael: Two ways, Kelly. First, my email is my first name, michael@mjmaes.com. And they could go to my website, which is mjmaes.com.
Kelly: Thank you so much for providing that for us. And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…
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