Hospital Survival in a Frictionless Utopia Part III:

Hospitals need a cross-functional approach that views each department as a key component within the clinical revenue cycle that drives overall financial performance and regulatory compliance.

If you’ve read recent articles on payer/provider relationships, you likely found stories about price transparency, surprise billing, anti-competitive/anti-trust issues, or pandemic-driven strife. That said, the conflict between the payer and provider business models existed long before these topics took center stage.

If you read Part I of this series, you know that the payer and provider business models are inherently at odds: payers are from Mars, while providers are from Venus. If you read Part II in this series, you know that the payer business model relies on increasing revenue, decreasing expenses, and managing that pesky medical loss ratio. To meet their goals, payers employ complex and not-always-obvious tactics. As a result, it is easy for them to go undetected by traditional provider metrics and key performance indicators (KPIs). Defending against these tactics requires that providers understand payer behaviors and start to look at the data differently. 

Would it surprise you to learn that most provider organizations have been using the same metrics and processes in utilization management (UM) since 2004? The most common measures of UM processes and performance still include observation rates, inpatient rates, length of stay, number of cases reviewed, and denial rates. Department-centric KPIs can undermine your organizational performance, and are often used by payers to justify withholding appropriate provider reimbursement. Payers have devised strategies that keep provider department-siloed KPIs looking good, all while they keep the money.

To combat this, hospitals need to engage in a cross-functional approach that views each department as a key component within the clinical revenue cycle that drives overall financial performance and regulatory compliance. Provider UM sits at the intersection of clinical decisions, regulatory requirements, managed care contracts, and reimbursement. Therefore, the UM program must become a finance priority for hospital leadership. Establishing intra-departmental relationships and communication between UM, managed care, clinical documentation integrity (CDI)/coding, and the billing/business office leads to enhanced monitoring and tracking of payer performance. Metrics for all hospital departments must focus on revenue optimization and compliance for the organization as a whole, and not on individual team/department performance or tactical requirements.

Let’s use the denial rate, the most frequently discussed hospital UM KPI, as our example. Everyone in the clinical revenue cycle knows that denials are bad. As a result, most hospital tactics for managing the denial rate focus on preventing or reducing denials. Many hospitals have even implemented software with (often payer-created) artificial intelligence (AI) or have even given payers access to the electronic medical record (EMR) to create a “frictionless” system to decrease denials.

But hold on – this is where we need to throw a flag on the play, stop the clock, and ask a series of pertinent questions. First, what does the denial rate represent to the hospital’s business model? A denial means no payment for services provided. The denial itself is not the problem; the problem is the lack of reimbursement for services provided. Therefore, the approach to denials must focus on the lost revenue, and not the denial itself.

Second, why would payers want to help providers decrease denials? That doesn’t match their business model at all – or does it? Reducing a provider’s denial rate would increase a payer’s expenses, contrary to their goal. Payers do not have any incentive to help a provider lower its denial rate, and any claims that they do are likely a Trojan horse.

When providers look more closely at their denial rate and truly understand what it is measuring and how it impacts revenue realization, it becomes clear that the most common approaches to decreasing denial rates are actually supporting the payer business model, and not improving reimbursement for care provided. The simplest and most common way that siloed UM teams can decrease denials is to merely accept observation status. This can happen at every step in the UM review process. Using payer-owned or -influenced commercial screening criteria is the quickest path to observation status. Commercial screening criteria require a patient to meet an intensity of service and severity of illness that gets more challenging with each passing year. Accepting observation status for patients requiring hospital services across multiple midnights, based on payer criteria or processes, has led providers to inappropriately overuse observation status when inpatient admission is appropriate. The outcome is equivalent to the provider self-denying itself revenue. The hospital personnel involved in the process have internalized the payer’s rulebook and business model – and, in essence, act as the payer’s agent in the process. This results in thousands of dollars in self-denials that happen multiple times a day and are never identified in a denial metric report.

There are many opportunities across the entire clinical revenue cycle for providers to inappropriately accept observation status to avoid a denial. Remember those payer-employed/owned physician groups that are incentivized to maximize payer profits? They will routinely order observation status over inpatient admission and claim that they support leadership’s goal to avoid unnecessary denials. Physician advisors also know that denial rates are measured, and to bring value and not waste time, they decide to appeal only those cases they feel confident that they can absolutely win. Does your physician advisor team boast an overturn rate of 80 percent on peer-to-peer payer appeals? If so, they are falling victim to the same problem, managing metric optics, and not optimizing financial performance. It’s easy to achieve a high denial overturn rate by only appealing a few cases that are absolutely inappropriate denials. Worse yet, if the provider downgrades a case from inpatient to observation status before discharge, they can optimize two metrics: appeal overturn rate and denial rate. While the metrics may look great, the hospital revenue will be inappropriately reduced. (Side note, the peer-to-peer denial overturn rate is another bogus KPI.)

The opportunities to decrease revenue in the name of reducing the denial rate don’t stop arising after patients are discharged; they continue into the business office, where providers often implement processes that change claims post-discharge from inpatient to observation status to avoid administrative payer denials and those nasty write-offs. Lastly, if a provider can’t track a case from start to finish, it will miss the emerging trend whereby payers agree to inpatient care through the UM process, but the final payment provided is equivalent to observation status – and it goes unrecognized because it was never classified as a denial by the provider.

There is an economic principle known as Goodhart’s law that states that when a measure becomes a target, it ceases to be a good measure. The provider measure of denial rates is a classic example of this. The payer has manipulated every aspect of that measure to ensure that it never reveals the positive economic impact for the payer business model and the negative revenue impact for the provider. Thus, payer-orchestrated misuse and overuse of observation status by providers to avoid a high denial rate, while self-inflicted, has the same impact as a payer-issued denial. It’s just never captured in the provider denial rate KPI.

Unmeasured denials are insidious – and rampant in the clinical revenue cycle. This is just one example of the many ways providers’ current KPIs are being manipulated to support the payer business needs, not the providers’ needs. For providers to succeed, it takes a multidisciplinary approach to enhance internal processes to combat payer tactics. It also requires a new set of meaningful KPIs to reveal and plug the inappropriate revenue leaks. And finally, it takes courage and effort to face off with giant organizations that have data, money, and time on their side.

The key to success in a payer-dominated relationship is for providers to realize that they too have data and tools to pursue new solutions to old problems – solutions that support the provider business needs, and not the payer business needs. Once providers overcome the fear of the denial rate by understanding what their internal data is and is not telling them, then they will be able to embrace new measurable and actionable analytics that measure the right metrics, yielding appropriate reimbursement for services provided, per regulations and contracts. Look at the metrics and KPIs that you are currently measuring and ask the following questions:

  • Can these metrics look good while resulting in decreased revenue and sub-optimal performance?
  • Where can department goals conflict with organizational performance, and how can we ensure we don’t create misaligned incentives?
  • What is my goal, and what metrics can be used to reliably measure my progress towards that goal?
  • Do these metrics compare my hospital performance against published benchmarks?
  • Do we have a methodology for interpreting the root cause(s) of variance from benchmarks?

The actual financial impact of a payer’s behavior can only be accurately and reliably understood when evaluated as the cumulative impact of all the functions that affect performance and revenue. Outcomes monitoring must be paired with process monitoring to ensure ongoing success.

To survive in a payer-dominated relationship, providers must speak the same language: the language of data. With the right data available, providers can be ready to enforce their contractual rights, whether through contract negotiations, joint operating committees, or arbitration and litigation.

Final thought: arbitration and litigation are not scorched-earth approaches only to be used as last resort; rather, they are the final step in the providers’ rights to appeal, and often documented in payer contracts.

They can be powerful tools if used consistently as a final step in the UM process with payers.

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