Unlock The Vault: Cracking the Revenue Cycle Code for EBITDA Enhancement
When a healthcare provider group lacks efficient revenue cycle management (RCM) processes, the result is often carrying unnecessary costs while leaving collections dollars on the table. RCM is too often an afterthought—until symptoms show up in the form of slow and declining cash collections, a liquidity crunch, or unduly RCM expenses.
On the flip side, an efficient RCM function has the potential to improve patient satisfaction while unlocking significant value through EBITDA enhancement. Recurring revenue and cost savings derived from RCM improvements—e.g. 2-5% improvement in Net Collections Rate and 15-30% reduction in cost-to-collect—can ultimately yield margin improvement often hitting 5% or more. So, how do we “unlock the vault”?
Investors and their healthcare portfolio companies can measurably transform their RCM function with three key steps:
- Benchmarking current performance
- Identifying optimization levers
- Implementing target solutions to prevent revenue leakage and enhance performance
1) Use the “95 & 2” rule to benchmark RCM performance
To evaluate how well current RCM is functioning and understand where the biggest opportunities for unlocking value lie, companies must benchmark their performance, including workflow, productivity, and KPIs.
When it comes to healthcare provider clinic settings, 3 key indicators provide a lens into the initial diagnostic review of RCM. A close look at these key indicators will begin to uncover common problems, which include:
Net Collection Rate
|> 95%||• NCR is an indicator of RCM orgs’ effectiveness in collecting reimbursement dollars.
• NCR is impacted by process gaps and inefficiencies: coding errors, denials, expanding bad debt, late claim filings, and payer underpayments.
Clean Claim Rate
|> 95%||• Claim denials can arise from recording/ administrative errors or lack of proper documentation.
• Low clean claim rates necessitate re-filing needs and drive unnecessary rework.
|2 – 4 %||• Cost-to-collect > 2% of Collections indicates reliance on manual workarounds or redundant activities.
• High costs can result from large teams, reliance on an excessive number of revenue-collection systems, etc.
2) Identify and prioritize RCM optimization levers
There are several ways companies can correct a flawed RCM process. These techniques can be implemented with minimal impact on revenue collection operations while further optimizing the system overall. Measures like these can quickly drive value creation and enable long-term RCM improvements into acceptable ranges.
Digitization and Automation
One sure way to reduce manual effort and unlock stifled revenue is to digitize paper-based information capture and automate manual processes. Doing so can yield high-impact results across the business chain. RCM-critical processes also become readily available, quickly transmittable, and easily accessible for reporting.
Existing RCM efforts can be greatly enhanced by optimizing the RCM operating model. Hybrid staffing as well as accurate alignment of resources, particularly where manual and repetitive activities are involved, will have a real impact on cost structure and cost efficiency.
Improved Data Visibility and Rationalization of Core Technology
Healthcare organizations can build an efficient, tech-enabled RCM function by first rationalizing and then enhancing the existing suite of core technology streams (practice management system, EHR, F&A, to name a few). They must next look for opportunities to employ enhancements and additional tools that can drive these benefits. The result is a streamlined dataflow and a central data warehouse that improve visibility into metrics and provide insights into further improvement.
3) Develop an RCM operating model to support performance improvement and scale for growth
Currently, when it comes to a target business, private equity firms active in the healthcare space excel at many aspects of operational cost improvements and financial optimization. But RCM enhancements remain a stubborn blind spot in their approach to the overall value chain.
Incorporating a dynamic operating model that addresses key people, processes, technology, and organizational aspects allows for sustainable EBITDA improvement that adjusts to the needs of the business as it continues to scale up and mature.
By rethinking investment criteria to maximize accountability for the current and potential future state of RCM, PE firms have a golden opportunity to materially improve the long-term performance of their investments. Those PE firms that are able to “unlock the vault” will be rewarded through a boost in their return on invested capital (ROIC), enhanced internal rate of return (IRR), and secured long-term winners in their portfolios—all while continuing to provide high-quality services to patients.