Laboratory billing, like many markets, has had its share of debate over the merits of outsourcing the work. Some labs have experienced sub-par laboratory billing companies that only go after the low hanging fruit, while others have found that outsourcing has saved their laboratory and they will never go in-house again.
But what is really going on? What is the real value if any of outsourcing? In this article, we will provide you with a set of guidelines to better understand the benefits and potential pitfalls of outsourcing, and equip you to make a well-informed decision for your own laboratory.
The Cost/Value Relationship
We all do the math in our everyday lives: when to a pay a bit more in order to get better quality. A product of higher quality will deliver better value in the long run versus a low-cost product that fails quickly. A good pair of shoes or a reliable car may be examples of this. So, cost and value are distinctly different. And value (not cost) is what we are trying to maximize, whether we are conscious of it or not.
There is little question that outsourcing and the corresponding increase in offshoring has been able to lower costs in the medical billing industry, where compelling claims of cost savings have been difficult to resist. The logic, so it has gone, is that labor costs in countries like India and the Philippines are drastically lower, so there is money to be saved. And as those economies invest in infrastructure and begin to produce better-educated, motivated workers, the thinking is that they can compete with American workers in terms of their quality of work and even their English-speaking skills. This is only the cost side or denominator side of the equation.
Nowhere is the cost/value relationship more apparent (and more critical) than in medical billing services. After all, if you are hiring a service to collect money for you, then the value of their work is immediately (and dramatically) apparent. The math is pretty simple – your collections/revenue goes up or it goes down. If costs go down, but revenue goes down even more, then you have received no value (or perhaps negative value, if such a thing exists).
“Lower costs” is the hallmark of sales pitches by medical billing companies, especially Indian BPO’s, which may claim as much as 60% cost savings. But cost claims don’t help you assess the value of the service. In fact, such claims can be self-contradictory in terms of actual value delivered.
Here are some examples of how lower costs can actually precipitate a decrease in value:
- Labor rate vs. gross hours: offshoring may provide a lower (in some cases dramatically so) hourly rate for labor. But it is not wise to assume that the total hours will remain flat. The complexity of your medical billing needs may precipitate increases in labor assigned to your account that could drive your net costs up.
- Overhead costs: in some cases, claims about cost savings focus on hourly labor rate and fail to take into account the “real” cost, which includes overhead items such as benefits, software, management, etc. In fact, promised low rates may incentivize outsourced revenue cycle management companies to minimize the involvement of seasoned managers on your account, which may result in complex issues not being resolved as quickly, or not at all.
- Fixing errors: mistakes in medical billing are expensive not only in potential lost revenue, but the direct cost to identify and fix problems can be quite expensive. This can include large numbers of hours of billers themselves, as well as management resources dedicated to identifying and solving problems, potentially over the course of months.
- Patient experience: cutting costs may actually have a negative impact on your patients. If they have to wait longer for issues to be resolved, or have a tougher time communicating successfully with the right people to address issues, you could potentially lose patients, and thus revenue. And when evaluating this aspect of your medical billing system, you need to take into account the cost of replacing lost patients versus retaining the ones you already have. Any marketing person will tell you it’s difficult (and expensive) to get new patients.
Measuring ROI Rather Than Cost
So if you consider “lower costs” to be an objective, and the primary argument for outsourcing your laboratory billing services, then you have likely missed the bigger picture. You can actually achieve lower costs and be worse off financially as a result. A more useful measure of performance is return on investment (ROI), as examined in a previous article. Regardless of whether outsourcing reduces your costs, it will have a negative or positive impact on your collections, so when you add cost savings to the change in collections, there will be a net return (positive or negative) that is distinct from costs.
Once you frame your assessment in ROI terms, you can begin to make a more informed decision about any potential benefits of outsourcing your medical billing. Here are some important aspects of an “ROI-based” evaluation.
- Collection performance: what is the upside for outsourcing? Is there significantly more to collect? Selecting a high performing medical billing company is critical, otherwise not only may you not improve your collections, but you might go backwards. If your in-house billing team is performing well, then any outsourced medical billing service, even a great one, may be unable to improve significantly on that performance. On the other hand, if performance is mediocre or sub-par with the in-house billing team, there may be great opportunity for financial improvement.
- Performance measurement: assessing whether collections are actually going up or down, and for what reason, can be a vastly complex and difficult thing to do. But you should make it a priority to understand how to measure performance, what to measure, and what it will tell you. Any outsourced billing service should have proscribed KPI’s (key performance indicators) and provide performance reports on a regular basis. It might make sense to arrange for periodic audits by a third party as well.
Evaluating Your True Costs
Although it seems self-evident that you need to know your costs before you know if you are going to save money by outsourcing, it can actually be quite challenging to evaluate your costs. Here is a checklist of items to consider when calculating your in-house costs.
- Office expenses: all material supplies such as computers, phones, desks, chairs, printers, scanners, fax machines, copiers, filing cabinets, office cubes, coding manuals and reference materials, etc.
- Software and software maintenance costs: this is not a one-time expense, but an ongoing one, since software must be maintained/updated with new licenses, etc. You will also typically have clearinghouse costs associated with your software.
- IT staffing: staff hours are used to support systems like help desk, periodic equipment installation and repairs, interfaces to hospitals, etc., as well as backup and disaster recovery.
- Billing costs: there is a cost to generating physical documents like paper claims and patient statements, as well as adjacent costs like paper, envelopes, postage, printing ink, etc.
- Direct staff costs: this includes the medical billing team of course, as well as temp staffing for handling periods of increased workload, covering for sick days, etc. Additional allocation is required for supervisor and manager time that is or will be dedicated to managing the billing team. And costs will also include basic HR functions like recruiting, hiring, administering benefits, performance evaluations, salary reviews, training/on-boarding, resolving disputes, etc.
- Overhead costs: a medical billing team increases your general overhead expense load for items like rent, utilities, internet service, insurance, and HIPAA compliance issues.
- “Hidden” variable costs: it is easy to make the mistake of viewing some costs as fixed when actually they are not. One common example is computers. You may have the mindset that once you have purchased computers for your staff, you will not incur that cost again. But the opposite is true, because you must upgrade computers periodically. And if you do not replace the computers in a timely way, productivity will suffer and lower output needs to be estimated, as the computers are unable to run the latest software, etc.
- “Opportunity” costs: an in-house medical billing team will invariably draw time and attention of the Docs or the owners of the business. This in itself is not necessarily a bad thing, but should be viewed in the context of how that time would otherwise be spent. Would that time be used to engage in activities that drive growth like marketing and sales or other key strategic initiatives? If so, it should be considered a cost.
Making a Valid Cost Comparison
You may well achieve significant cost savings with outsourcing, but as we have seen, you can’t make an informed decision based on cost alone. Performance differences can often vastly outweigh cost differences, so the cost must be evaluated against a service level that is comparable to or better than the performance you are getting in house.
The fact that most medical billing companies charge based on a percentage of collections makes an “apples to apples” price comparison even more critical. This means you need a deep understanding your own costs, because it will allow you to make an effective comparison. In order to make such a comparison, follow these best practices:
- Know your costs as a percentage of your collections: once you have established your costs based on the above list, add it all up and divide it by your total collections on an annual basis. This will be a lot of work, but the payoff is having a basis for direct comparison when evaluating outsourcing options. If the medical billing company breaks out line items costs (not all of them do), use those for a more fine-grained comparison. You might even find places where you are over-spending.
- Make sure they know and evaluate your business: any reputable medical billing company will want to analyze your laboratory before submitting pricing. If they don’t, consider that a red flag. All laboratories are different, and things like volume, payer mix, test mix, and services required, among other things, can swing the price significantly. Their pricing should reflect a comprehensive understanding of your needs.
- Evaluate management resources discretely: some medical billing companies provide a lot of management resources like data analysis, coding consulting for the laboratory, fee schedule consulting, process improvements, etc. These may be difficult to quantify, but you can improve your ability to evaluate them by quantifying your own management costs.
- Evaluate any differences in software: if you move to an outsourced medical billing solution and the medical billing company has a sub-par billing system (you know the companies that use Medical Manager for example), it may require more labor (and more expense) to maintain your current collection levels. And the opposite may also be true. If the new billing company’s software is better than your LIS billing module (and it often will be), you should factor that in as well.
Benefits of Scale
With scale comes efficiency, as is demonstrated across many, if not most, industries. Medical billing is no different. Many medical billing companies have a real argument in their favor here. Medical billing is all they do, and they typically do it at a scale you could never match. Even if you have even a dozen in-house billers, then chances are the people on your billing team are more generalists than specialists. They must wear many hats and understand many aspects of the medical billing process. They must back-fill for each other and there are not enough scale economies to have highly specialized individuals, e.g. a senior Medicare collector performing appeals only or a payment posting department. They are broadly skilled across many functions, but perhaps not deeply skilled in any of them. But at a larger scale, they could specialize, and each member of the team might have one function and the time/attention to go deep and learn all the nuances of that function. Theoretically, such a team would be more efficient.
Some of the potential benefits of scale which medical billing companies can provide are as follows.
- Efficiency translates to lower costs: an outsourced medical billing company can deliver an efficiency premium which translates into greater productivity and better performance, which means lower costs or more resources available to generate better financial results.
- Greater leverage in overhead spending: scale economies can even extend to things like HIPAA compliance, employee recruiting and training, coding education courses, software and interfaces, etc. With scale, medical billing companies may be able to justify the purchase of more sophisticated software systems, or invest R&D dollars into new processes and systems that few labs could never afford.
- Employee skills and specialization: people who post payments only do that. Coders only code. This keeps costs lower (you won’t need to ask your coder to post payments), and productivity higher. You wouldn’t be able to do this in-house unless your laboratory is large enough to support a team of more than 50. And even if you could, you would have a host of other burdens like recruiting, hiring, training, etc.
- Concentration of talent: medical billing companies can locate in places where labor is cheap and plentiful, while a medical organization likely needs to locate it’s billing near its patients and doesn’t have sufficient economies of scale to set up in a remote less expensive location.
- Flexibility: large medical billing organizations are better equipped to handle fluctuations in volume within your laboratory. If your volume jumps up or goes down, it is likely to put you in a tough position: you will either have a backlog (and frustrated patients), or you will be paying people not to work. Scale allows medical billing companies to absorb these fluctuations more easily. They can expand or contract their staff, or the staffing on your account, more rapidly and smoothly. If it is a temporary fluctuation, resources can be moved to or from another account temporarily by utilizing overtime, while permanent changes can be addressed more easily by a billing company since on-boarding and training is streamlined.
- Human resources efficiency: medical billing companies are likely to have larger and more skilled, experienced HR departments. They will certainly be well versed in recruiting, hiring, on-boarding, training, education/accreditation, and such. This gives you a hedge against ugly surprises like the sudden loss of a key employee.
- More skilled managers: large medical billing companies should have the resources (and the motive) to hire seasoned, skilled managers with deep expertise, employees who would be difficult or impossible for you to justify hiring (even if you could). This makes it easier for them to provide effective employee support like setting goals/incentives, performing evaluations, resolving conflicts, etc., as well as to solve thorny billing problems that have the potential to disrupt cashflow.
- Industry acumen & consulting: medical billing companies have a vested interest in accumulating comprehensive institutional knowledge of the field, including compliance, case law, fee schedules, etc. While not all billing companies do this, it can be highly valuable if they do. Through their access to many laboratories, they may have or know of best practices that can significantly increase your collections.
- Purpose-built billing software/systems: most labs have whatever billing module that is coupled with the LIS they have chosen based on criteria unrelated to medical billing, typically clinical workflow. Therefore, many laboratories essentially have inadequate, sub-par medical billing systems that are depressing their revenue. Medical billing companies can select their software for its effectiveness in workflow and collections, so there is likelihood to have a better system that will increase your collections.
- More efficient interfaces: the complexity and nuance of hospital interfaces gives medical billing companies an advantage in that they have a financial incentive to be very comprehensive and efficient in setting up these systems. The benefit of an interface means that productivity of the billing company is improved significantly with faster access to records and fewer missing or incorrect patient charts. This is an ongoing cost, and must be closely monitored as forms of billing/payment rapidly evolve, so the advantages of scale are significant here.
- Staying current with compliance & regulation: it’s a daunting task for any laboratory to keep abreast of changes in coding and reimbursement, let alone changes in laws governing health care, like ACA and MACRA. Most in-house medical billing teams will need a formal compliance program or an outsourced solution for that component of billing management. A medical billing company can more easily afford a full time compliance team, which can make your life a lot easier.
- Timely & useful analytics: medical billing companies will more often be able to purchase or develop best-in-class BI (business intelligence) software, which provides you with better reporting. Analysis of the reported data should help you make informed business decisions.
Additional Key Considerations
In addition to the items mentioned above, here are some basic guidelines to help with the decision making process.
- Find the weakness in your own business: determine the questions you want to answer about your business and the reports you’d need to create to answer them. This identifies the information gaps preventing you from operating the business as effectively as you would like, and will create a good template for what you should request from an external resource.
- Get actual, real-world reports from companies you are considering: for example, get accounts receivable aging by payer, or an average reimbursement by procedure code over time. Make sure any reports are in a format that is useful. Specifically, make sure numerical data is in a format like .xls (Excel), .csv, or XML, which will allow you to do your own supplemental number crunching.
- Ask for analysis and conclusions, rather than just raw data: good medical billing companies have analysts who can create data representations like pivot tables and other useful data analysis tools.
- Map out the communication process: prepare to be proactive in communicating with the medical billing company; don’t assume they will take care of everything, or even contact you when issues arise.
- Consider fraud risk as a cost: in general, you are less susceptible to fraud when using a medical billing company, since it is harder for an individual to have control of cash flow from end-to-end. Fraud typically occurs where one person can engage in it, and having external billing means that fraud would have to involve collusion between the outside billing company and an internal person, which is much less likely than a single bad actor within a laboratory.
- Align incentives: as with all things in business, people tend to do what is in their own best interests. You need to assume that outsourced medical billing companies do not care about your business as much as you do. They may not pursue difficult claims with the zeal that you might, since that sort of activity may be perceived to them has high-cost and low-return. So they may stick to the “low hanging fruit” and leave bills uncollected. To address this, laboratories would be wise to either devise a financial incentive system that rewards the billing company for collecting on harder claims, or at the very least the laboratory should ensure that billing company provides complete transparency to demonstrate that it is following up on all claims and performing at the level that it should be.
- Don’t give up full control of your data: having a daily back up system, whereby the data from each day’s transactions is transmitted to a secure backup location under your control is a good business practice, regardless of whether you bill in-house or you outsource since even an in-house billing manager could in theory hold a laboratory hostage by changing the passwords. This is a good practice even where there is little risk of bad actors, as natural disasters or other events can put your data (and thus your laboratory) at risk.
- Don’t hobble your billing resource: remember that a medical billing company relies on you to do your end. If your front desk or administrative personnel are not doing their part, or your employees don’t respond in a timely way to inquiries from the medical billing company, you may sabotage your opportunity to benefit from the service.
If you are considering an outsourced medical billing solution, here is the bad news: you have a lot of work to do before you can make an informed decision. But the good news is, if you do the work, you have the potential to save a significant amount of money, increase your collections, or in some cases both. In order to determine which, if any, billing company would increase your collections you should undertake a thorough quantitative analysis.
While much of the analysis seems to focus on the cost saving benefits of outsourcing due to low labor costs and economies of scale, you are not necessarily better off going that route. While many billing companies tout absurd savings of as much as 60%, this is unlikely to be the case for your business. More likely, improvements in collections have the potential to more significantly impact on your bottom line. Additionally, you will only benefit if you can find a high quality medical billing service that fits with your laboratory.
Here are two compelling reasons why you might keep medical billing in-house:
- You are unable to find a high quality medical billing company that meets your needs
- A company is a good fit, but won’t take your business (many companies have a minimum size)
In the end, you should only outsource if you find a medical billing service that can demonstrate that it has the ability to generate as good or better collections than an internal billing department. Either way, the choice is not an easy or a simple one. Be deliberate and patient in your decision process. Don’t move precipitously in the interest of slashing costs. As the saying goes, never be “penny-wise and pound-foolish”. The more time and care you take to evaluate, the more likely you are to achieve great financial results.