Computer Software Update

The phenomenon is well known to health care providers and service professionals: despite your best efforts to provide excellent customer care and service, the effect does not translate into bottom line profits. In order to increase your profits margins, and the financial health of your business, you need to have highly effective billing and collections processes in place.

Cash flow is critical to any business. However, in most industries, an invoice is delivered directly to the responsible party. Think of the bills you pay for auto insurance, or utility service. For health care companies, the primary source of reimbursement typically comes from third-party payers. The third-party reimbursement process has never been simple, and has grown increasingly difficult in recent years. It is a time intensive process that requires great discipline and follow-through. Those who have adequate processes in place and a watchful eye will spot claim deficiencies and correctable trends. The result can have an exponential affect on profit margins.

Earned income can be lost forever due to denied or unpaid claims when, in many cases, the rejections are entirely avoidable. It could be as simple as a coding error or as complex as a poor accounts receivable infrastructure. The simple fact is that if this critical part of your business is not being handled properly, it's costing you money.

The importance of an effective billing and collections process is increasing as the current industry changes take affect. The Medicare Modernization Act of 2003 includes some drastic reimbursements cuts. There are looming regulatory issues such as the mandatory face-to-face meeting with a physician for all durable medical equipment, prosthetics, orthotics and supplies. Competitive bidding is high on the horizon. Mergers and acquisitions are at an all time high due to smaller providers choosing this time to exit, and larger ones trying to retain market share and growth rates. For these and other reasons, providers are smart to take a hard look at all their business processes, with a specific focus on claims processing.

To prevent your company from losing earned revenue by making billing and collections mistakes, you need to develop a greater understanding of the methodology of your business. Comprised of your enterprise workflow and payer mix, the business methodology helps you identify the strengths and weaknesses of your company as they relate to claims processing. This information can then be used to improve the manner in which you handle your billing and accounts receivable.

Implementing or tweaking a formal A/R management process should be the goal of every provider in 2005. It not only helps produce significant increases in cash flow and operating revenue, but it also ensures that same mistakes and oversights that led to claim denials in the first place will not happen again. But before you can establish an A/R process you will need to examine your business methodology.

The Significance of Office Workflow

The obvious first step towards establishing an effective A/R management process is to understand how your business operates. This can easily be accomplished by detailing your office workflow. There's just one problem: despite the increased attention of the past few years, office workflow remains an untouched topic for many health care organizations. Key staff members should have a general understanding of the enterprise workflow and have an intimate understanding of the workflow within their departments. This starts with lead generation activities and does extends post-sale to customer service issues.

Most companies cannot provide a concise definition of "office workflow," much less detail their existing business sequences. The dictionary defines workflow as a series of tasks within an organization that are designed to produce a final outcome. At each stage in the workflow, one individual or group is responsible for a specific task. Once the task is complete, the individuals responsible for the next task are notified and receive the data they need to execute their stage of the process.

Billing and collections is a big part of the process and represents two of the most vital components of your office workflow. Billing is the primary action that leads to your final outcome collecting. Figure 1 outlines an office workflow for a typical medical supply company. Everything from marketing to reimbursement reporting is incorporated into the flow chart. And while the inclusion of marketing may seem unnecessary, it's the removal of any stage from the workflow?no matter how trivial?that usually leads companies to neglect a more important step down the line.

Most companies don't think much about workflow management until routine tasks are delayed due to disorganized work processes. At that point, there is no way to avoid the interruptions and inefficiencies it causes their operations. Therefore, office workflow should always be viewed as a flexible composition. Your flow must match the unique operational techniques employed by your company if you ever hope to identify any of the common issues that lead to underpaid or denied claims.

Referring back to Figure 1, you will notice that the enterprise workflow demonstrates how the company operates, but fails to be specific on how tasks are performed. This broad view is what causes many claims to go unpaid. For example, there is no mention of how often claims are reviewed (these are part of the A/R process and will be explained in detail next month). With this in mind, the workflow needs to be adjusted to include some of the more important stages that had been left out. The resulting changes lead to a more focused flowchart (Figure 2).

Expanding & Diversifying The Payer Mix

Just as understanding your office workflow allows you to identify where mistakes could potentially be taking place, breaking down your payer mix can go a long way towards increasing your future cash flow. The payer mix is comprised of all of the sources of revenue your company generates, including payments received through third-party claims as well as cash from retail sales. Knowing your payer mix gives you a better understanding of not only where your money is coming from, but also how much effort you are putting forth to get it.

The payer mix can be as important of a competitive advantage as your product mix. As the reimbursement landscape changes, you can shift to more lucrative revenue streams. With the MMA, competitive bidding and a baby boom population that demands choice and quality, there is an expected movement away from Medicare and towards retail sales. Medicaid can offer steady business, though usually at lower reimbursement rates. The key is to keep your options open and look for business that might be underserved.

According to a recent survey, there are five primary sources of funds in the payer mix (see Chart 1). The following is a breakdown of each source by its overall contribution to your bottom line, including a brief primer on the ease or difficulty in collecting payments.


Medicare remains the primary payer to medical supply companies, responsible for an estimated 44 percent of all payments. The reimbursement rates have been historically favorable, though they have been decreasing recently.


Medicaid is the second leading payer source at approximately 18%, but is sometimes more challenging to work with since it requires prior re-authorizations. Some Medicaid programs have had budgetary issues lately, which might lead to difficulty with timely payments. Regardless, this is a steady source, and is the primary source in certain markets.

Managed Care

Managed care reimbursement might seem to be a cumbersome maze to some. Immersing yourself in managed care reimbursement means multiple contracts and plans. There are case manager reviews and payments are heavily discounted. Claims have shorter expiration periods in some cases, and some plans have a tendency to pay later than others. Managed care companies make their money on the spread in reimbursement rates between payers and providers. An average of 18% of health care claims are routinely denied by managed care plans, according to providers participating in a survey by The Managed Care Information Center (MCIC).

Private Insurance

Private insurance, when available, can be a lucrative revenue source. While this type of insurance was the norm twenty years ago ? prior to the managed care boom ? it is less common today. You typically find these sources in towns with larger employers. Private insurance often pays more, however, they are looking more like HMOs than before. Plans may now require prior and re-authorizations. Some now limit the number of total visits or total amount paid. However, payments are typically received faster than Medicare, Medicaid or managed care plans.


Cash or retail sales are the biggest growing reimbursement source in the Homecare/DMEPOS industry. As Medicare reimbursement rates fall and baby boomers continue to demand quality products and services, there is a school of thought that says more customers will be willing to pay for the products themselves. Some healthcare providers might consider it wishful thinking not to have to deal with CMNs, prior authorizations or claim denials. However, with the changing patterns taking shape, you might want to set yourself up with a merchant account and look at some direct to end user marketing activities.

Tying It All Together

At times it almost seems as though healthcare providers refuse to learn the basics of how to avoid denials, which is embarrassing since some of the rejections are self-inflicted. Most medical management systems now incorporate some form of office workflow into their software to help companies reduce the amount of time spent on individual tasks. Additionally, these systems are capable of producing a variety of reports that can effectively break down your payer mix and analyze office productivity.

With this in mind, medical equipment providers need to take the time to thoroughly understand how their claims are managed. While detailing your office workflow and payer mix can prevent some of your internal errors from occurring, it?s the establishment of a comprehensive A/R management process that will save you a significant amount of money in denied or unpaid claims. And the A/R process cannot be successfully developed without knowing your office workflow and payer mix.

Learning how your business really runs is a time intensive procedure. However, this short-term investment in strategic research will be more than compensated with a long-term improvement in overall cash flow.

This article originally appeared in the January 2005 issue of HME Business.


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