Healthcare accounts receivable valuation: Four pitfalls to avoid

When one of the larger integrated health systems in Illinois announced a $92 million accounting error — citing an over-estimation of expected revenue from insurance companies and patients — it shocked many in the healthcare industry and served as a catalyst for other providers to revisit their accounts receivable (AR) valuation methodologies.

Healthcare AR valuation is a high-risk area. It’s very complex and, because it relies on assumptions and estimation, it’s susceptible to errors and fraud. But, that’s just the start. Healthcare AR is further complicated by frequent regulatory changes, ever-changing payment models, increases in the use of high-deductible health plans (HDHPs), and the addition of large pools of previously uninsured people being funneled into health plans by the Affordable Care Act (ACA).

To add to the challenges, collection varies by patient and by plan, and collection times can range from days to years. The result? Many existing AR valuation approaches aren’t adjusting correctly, and organizations are having to figure out how to quantify and calculate impacts and make changes to account for them.

Many existing AR policies and procedures aren’t adjusting correctly, and organizations are having to address concerns they didn’t see coming.

As a healthcare provider, what should I do?

First, undertake a thorough review and analysis of your organization’s AR landscape. It should begin with a data analysis effort that looks back at AR over a historical period. Try to figure out the “why” behind the numbers. Next, round up your organization’s key stakeholders, including the chief financial officer, controller, head of revenue cycle, and reimbursement staff. If your organization doesn’t have the data analytics skills or level of resources required to do this quickly, consider bringing in a consultant to help.

What should we look for in a healthcare AR analysis?

Based on our review of organizations’ healthcare ARs, we’ve found four primary risk areas:

• Inaccurate contractual allowances and/or poor reserving methodologies
• Inadequate processes
• Failure to keep current with changing reimbursement and regulatory environments
• Inadequate resources

Below, we describe each potential pitfall and provide a few questions you can ask to help determine your organization’s AR risk exposure.

Risk 1: Inaccurate contractual allowances and/or poor reserving methodologies

A key problem we frequently uncover through AR data analysis is inaccurate contractual allowances and/or insufficient reserves. Organizations discover their methodologies aren’t as strong as they initially thought and, in some cases, they’re simply not accurate. The systems and procedures in place suggest their contractual allowances and reserves are sufficient, but the data shows the numbers can’t be justified.

Here are some questions to ask to determine if contractual allowances/reserving is a risk area for your organization:

• Does your organization have a reliable system and process in place to calculate and reconcile contractual allowances? If so:
  • Is the staff sufficiently trained to ensure adequate data entry and accuracy of calculations? Are contract terms and calculations regularly tested and updated in the system according to an established process?
  • Are contractuals booked at the time of billing?
  • Are regular AR and revenue true-ups performed to adjust for differences between originally booked amounts and actual collections?
  • Are AR subledger balances reconciled to ensure all AR balances are included in contractual calculations?
• Does your organization have an AR reserve methodology that’s formalized and supportable based on historical experience and industry data? If so:
  • Do the reserve percentages increase as AR ages?
  • Do items over 365 days that aren’t fully reserved require management explanation and approval?
  • Does your AR reserving methodology also include specific items outside the aging method approach that need special consideration?
• Does your organization review its reserves methodology for accuracy at least quarterly? If so:
  • Does it compare what is realistically being collected to the reserving methodology?
  • Does it confirm that the methodology is supportable with data?
• Is actual collection and write-off experience compared against historical reserves to ensure adequacy of your reserves?
• Has management reviewed the detailed calculations and performed an overall reasonableness test (i.e. what you realistically expect to collect versus what has been reserved)?
• Do the accounting/finance, revenue cycle, and managed care departments collaborate in the review?
• Are the review and accompanying analysis, support, and approvals documented by management?

If you said “no” to any of these questions, it may be time to revisit your approach to contractual allowances and reserving methodology.

Risk 2: Inadequate processes

The next big risk we see emerging from our AR risk analyses is inadequate processes. Often, a leadership team believes something is being done in a certain way, but an analysis of day-to-day operations reveals it’s actually being done another way — and important things are slipping through the cracks. Since processes and internal controls are closely linked, a problem with process usually means another internal control needs to be put in place to make sure it doesn’t continue going forward.

Ask yourself:

• Does your organization define and make consistent AR and revenue calculations, source data, and metrics/reports? Are the items originating from a central and consistent repository?
• Are policies and procedures for calculating revenue and accounts receivable, allowances, reserves, charity care, and other adjustments adequately documented?
• Does management override established calculation methodologies? (This should be avoided because it introduces the risk of errors in financial reporting.)
• Are requirements for reconciliations, checklists, and other critical financial close activities documented?
• Are your staff and management adequately educated in AR and revenue policies/procedures? Are periodic reviews of training materials and support documentation undertaken to keep up with technical, industry, regulatory, and organizational changes?
• Is your staff encouraged to raise questions or concerns around processes, data, numbers, and behaviors surrounding AR, and is the procedure for doing so clearly communicated?

Risk 3: Reimbursement and regulatory environment

Another significant risk to healthcare AR is a lack of organizational awareness of reimbursement and regulatory changes. Regulatory changes attributable to the ACA are now starting to show up in the numbers and, in many cases, adjustments aren’t being made in a timely manner. Some organizations believe they’re calculating AR accurately, but they’re not realizing that they need to make bigger adjustments (for example, for people who have $15K deductibles and aren’t likely to pay them).

Consider this: Is your organization adopting processes that monitor:

• Changes created by HDHPs?
• Chargemaster changes?
• Commercial and governmental payer changes?
• Fluctuations in quality payments?
• Seasonality of deductibles (collections change throughout the year as deductibles are met)?
• People falling out of ACA exchange plans throughout the year?
• Significant historical write-offs?
• Payer/reimbursement backlogs and increased denials?

Risk 4: Resources

As organizations uncover flaws in their AR methodologies, they’re also discovering they may not have the right resources in place. For example, they may have staff whose skill sets may not have kept up with the increasing complexity of the AR environment. In addition, AR reviews often find technology isn’t being used properly. If people aren’t suitably trained or the data going into the system is poor, the data out will also be poor.

Ask yourself:

• Do we have any known gaps in our resource needs?
• Do staff in relevant positions have the necessary healthcare AR/revenue and IT/financial systems expertise?
• Is management capable of assessing staff sufficiency, skill set gaps, and resource needs across accounting/finance, reimbursement, revenue cycle, managed care, and financial information systems?
• Do management and governance staff who review the AR and revenue calculations, metrics, and key performance indicators have the technical acumen and expertise to catch errors and prevent negative trends from going unaddressed?
• Are we providing adequate continuing education around industry and technical topics?
• Have we properly vetted the professional service firms and other vendors that we’re using?

Check and double-check

In this era of rapid industry and regulatory change, the potential for AR valuation errors is high. Hypervigilance is needed by staff, management, and governance to check and double-check the integrity of AR calculations, the data that goes into them, and the analysis and reports that come out of the reporting system. If the numbers on the books show one thing, but the cash in the bank shows another, now is the time to review your AR valuation methodologies.