Benchmarking the Cost of Processing Charges: Is Your Cost Too High?
Radiology practices create the largest number of new accounts per month of any specialty within a health care delivery system. On average, a practice reading 500,000 examinations per year would generate 35,000 new accounts per month. The billing issue that confronts every radiology practice is achieving a balance between processing costs and collection performance. This article will deal with assessing the cost side of the equation to determine whether what your practice pays to process charges is within reason. The spectrum for processing radiology charges is covered by five options:
- internal operations with dedicated staff, employed by the practice, using an on-site billing system under a license agreement;
- internal operations using an Internet-based billing system, where all transaction data are maintained on a server located off the office premises;
- a centralized receivable department that handles the billing for the academic radiology practices and all other specialties within a medical school’s practice plan;
- external operations, where all functions are handled by a vendor; or
- hybrid operations, where critical components of processing are subcontracted to vendors, but some of the easier follow-up requirements are retained in-house.
Table 1. In-house and Billing-service Respondents.Based on data from the 2006 Accounts Receivable Performance Survey, RBMA1 There is no information in the 2006 survey suggesting how many of the 2005 respondents also are in the 2004 and 2003 datasets. This relatively small sampling suggests that the trend is toward increased use of billing services. Table 2 suggests why this may be occurring.
Table 2. Comparison of 2005 Median Cost Per Examination: Professional ComponentBased on data from the 2006 Accounts Receivable Performance Survey, RBMA¹ Table 2 uses the median cost per examination, organized by examination volume. The first block, in-house systems, shows that smaller practices are predictably less efficient because they have to over-purchase the most expensive resources (computer systems and staff). In my view, the in-house cost per examination for the three-practice sample (700,000 to 1 million) is likely to be a statistical anomaly. Practices of this size should benefit from economies of scale. Clearly, the downward trend exhibited in the table should have continued. It is possible that one or more of these large groups does not track billing costs accurately, or is less efficient than it should be. The block representing billing services shows relatively uniform costs, with the exception of the 13 megagroups. The specialized billing vendors whose client base is dominated by radiology have economies of scale and are in a position to offer the same rates to any size group. The steeply higher average cost per examination ($3.87) for the megagroups is another anomaly, however, because the largest groups have substantial buying power and should be in a position to negotiate the best market rates available. The megagroups generally perform a proportionately larger number of higher-priced examinations, which could boost their costs if based solely on a percentage of collections. Perhaps a few of those in the sample negotiated their contract rates poorly. The value of measuring cost per examination is the ability to compute the annual cost of the in-house option versus use of a specialized billing vendor. It is a matter of multiplying the difference in cost per examination by annual volume. The last three columns of Table 2 offer an example. Multiplying the median volume for each population segment by the cost variance per examination produces the potential annual savings. The anomalies cited earlier skew the results for the last two groupings. The average savings in Table 2 for the groups at volumes of 700,000 to 1 million that outsource billing are overstated, and the disadvantage for those outsourcing at volumes of over 1 million is dubious. Billing Vendors Versus Individual Practices It is difficult for small groups to process charges in-house cost effectively because of the need to acquire competent staff and the requisite technology. The billing vendors have so many technological and scale advantages that they can profitably service a practice of any size less expensively. Vendors in the Northeast, where insurance carriers aggressively pay lower professional fees, are servicing clients at levels of less than $3 per examination because the competition for business is greater. The RBMA survey, organized by geographic region, illustrates this trend. Specialized vendors are able to provide cost-effective services because their direct operating expenses are much lower than those achieved by an individual practice. In spite of the fact that their rates include a profit margin, they still end up being less expensive for six reasons. First, they generally control their software source codes and have the flexibility to modify the programs when necessary, usually within their own IT departments. Second, their focus is on use of technology to screen the data and edit them before claim submission. They are able to use technology more effectively because the principals either have the background or are prudent enough to hire proficient staff to maintain cutting-edge programs that minimize labor costs. Third, they have more sophisticated coding staff and systems. Fourth, they have stronger relationships with state insurers because of their claim volumes and electronic filing, enabling them to secure more rapid responses on each claim batch, especially when field errors are involved. Fifth, their client base exposes them to many issues where solutions can be applied elsewhere in the enterprise; this is something that may not occur to a single practice. Sixth, their system costs per examination are spread over a larger volume of clients. Practice Quantification of Internal Costs The challenge to a practice that performs its own billing is identifying expense categories and earmarking them for the billing function. It is important to have operating statements produced each month, with every effort made to isolate those expenses devoted to the collection process. It would be useful to get assistance from a cost accountant who can help with the distribution protocols for expenses that are relevant to more than just the billing process. There are multiple expense categories, with both shared and separate characteristics. Manager wages and benefits: Large practices can afford a dedicated billing manager in addition to a business manager or COO. Small to medium-sized groups have the same governance needs, but cannot afford both. While the billing function will command the majority of this manager’s time, it is important to allocate costs between billing and entity governance. Coding-staff wages and benefits: Certified coders command relatively high wages. Small practices sometimes have difficulty finding or retaining good coders because of high demand for these individuals. This expense may be either wages and benefits or fees paid to contract coders. This second option, if available, may be best for small to medium-sized groups that cannot afford the cost of a coder because the fees are driven by procedure volumes. Additional expenses will be attributable to billing-staff wages and benefits and to continuing education (conventions, dues, and journals). Space rent, utilities, and warehousing: Some practices have multipurpose space where it is necessary to allocate the cost between the billing function and entity governance. Office-equipment rental: Make certain that the billing office’s equipment costs are separate from those of the entity. Billing system hardware and software leases, licenses and warranties: This expense pertains to either the on-site hardware/software or to the access costs attributed to Internet-based systems. Electronic interface expenses: While medical billing systems handle a large percentage of standard operating procedures, any unusual interface requirements will cost extra. This pertains to programs that facilitate electronic interfaces between hospitals and the billing office. There may also be added fees for programs that help submit electronic claims to non-Medicare insurers, as well as for handling electronic remittances. There are fees assessed by clearinghouses that aggregate claims to commercial carriers, and Internet-based fees are also in this category. Three common expense categories require allocation because they apply to other entity matters, in addition to billing: paper supplies, forms, and mailers; office supplies; and postage and courier fees. The isolation of billing expenses, with the total then divided by the billed examinations, will give the practice the information needed to measure itself against the marketplace. The RBMA survey cautions against the exclusion of certain technical surcharges from the examination count. It references the typical categories of billed transaction that are unique to both radiology and pathology, where an examination can have two components (technical and professional). There are instances where a single procedure may have each component billed separately; these should be consolidated (made easy by listing the CPT® codes with their modifiers). A practice that could be a candidate for outsourcing has to consider those earmarked expenses that do not immediately disappear. For example, space or equipment leases may extend into the future. One key component for the small to medium-sized practice is the business manager. Outsourcing will require the practice to make a decision about retention of the manager to handle entity-governance issues that may not necessarily require a full-time person. Given the compensation and benefits paid to a business manager, it would be prudent to explore retention of a medical practice-management consulting firm to handle governance issues. Conclusion The information from the RBMA survey is now more than two years old. It is likely that the difference in cost per examination has widened between in-house processing and billing services. Insurance companies continue to be aggressive in their demands for price concessions from the providers. This pressure filters down to the billing vendors, whose incomes derive from a percentage of cash. They explore technology-driven solutions, seeking to keep labor expenses under control. This same pressure is not exerted on internal systems because most practice members are not well-versed in understanding their internal costs and how they are measured against the marketplace. The relatively lower technological sophistication causes internal operations to increase staff size as a way to address changes in information demands.