Revenue Leakage in Healthcare: Causes, Impacts, and Prevention Strategies

Revenue leakage is an alarming problem that impacts the financial stability and operational efficiency of all hospitals and healthcare systems. With escalating costs and limited resources, no institution can afford revenue leakage, regardless of size. Unfortunately, hospitals are estimated to lose tens of billions of dollars annually due to uncollected or delayed payments.

As healthcare organizations grapple with mounting financial pressures and the need to deliver high-quality care, understanding the causes, impacts, and prevention strategies associated with revenue leakage becomes crucial. To that end, here's an overview of patient leakage in the healthcare industry and some strategies to counter it.

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What Is Revenue Leakage In Healthcare?

Revenue leakage is a loss of revenue where a healthcare provider fails to get timely payment for services. This problem starts when many billable accounts remain unpaid for a long time, usually over three months.

The longer you take to follow up on the payments, the harder it becomes to recover the money. If preventative measures aren't taken, revenue leakage within a healthcare organization can lead to operational inefficiencies, compromised patient care, and reduced investments in infrastructure and technology.

What Are the Causes of Revenue Leakage?

Here are the leading causes of revenue leakage in the healthcare industry.

Inaccurate coding and billing

Practices that use manual data and billing entries are the most prone to inaccurate coding, especially when they have a vast patient base. Manual processes are prone to human error, so healthcare organizations should consider investing in data automation tools to avoid mistakes in coding and billing procedures.

Bad debt

Bad debt occurs when patients are unable or unwilling to pay their outstanding medical bills. This issue is often exacerbated by factors such as:

• Inadequate insurance coverage
• High-deductible health plans
• Rising out-of-pocket costs

Healthcare organizations are frequently left with the challenging task of collecting unpaid balances, which can be time-consuming and resource-intensive. This process involves tracking down patients with outstanding balances, making multiple attempts at communication, navigating legal processes, and managing potential negative impacts on provider-patient relationships.

Denied claims

According to a 2020 Change Healthcare Revenue Cycle Index report, 11.1% of claims were denied upon initial submission. There are many reasons why claims are denied, and some common reasons include the following:

• Medical necessity: The insurance companies may not believe the services provided are medically necessary.
• Preauthorization: Preauthorization was not obtained from the insurance company.
• Out-of-network provider: The provider is out-of-network for the patient's insurance plan.
• Patient responsibility: The patient has not met their deductible or coinsurance.

You can appeal a denied claim, but the appeals process can be complex and time-consuming. Sometimes you can negotiate with the insurance company to get the claim paid, but other times you might have to write off the loss.

Contractual disputes and underpayments

Contractual disputes and misunderstandings are common when transferring a contract from one insurer to another. Insurance companies all have different policies, and what worked with one payer may not work for the new one.

Miscommunication errors can also happen when a patient transfers coverage from one insurance to another and causes an underpayment. Underpaid claims may be better than wholly denied claims, but they still impact the bottom line of a healthcare organization.

Improper documentation

Improper documentation causes revenue leakage in the healthcare industry through several channels. Inaccurate or incomplete documentation leads to billing and coding errors, which may result in denied or underpaid claims.

Improper documentation also creates difficulties in tracking and monitoring patients' accounts. This makes it challenging to collect payments and manage accounts receivable efficiently.

Noncompliance

Noncompliance with industry regulations and standards can expose healthcare organizations to legal and financial penalties, such as fines and reimbursement reductions. These penalties can significantly affect your organization's revenue stream. Compliance issues may also damage your reputation, potentially leading to a loss of patients and contracts with insurance companies or other partners.

Pricing and charge capture errors

Inaccurate pricing and charge capture errors can significantly impact your hospital finances. If you undercharge, you risk not getting paid fully for the services provided. On the other hand, an overcharge may ignite trust issues with your patients and affect your reputation. It may also have legal ramifications, such as civil penalties.

Computer glitches, human error, and improper training could all cause pricing and charge capture errors in your healthcare facility. Invest in a robust auditing system and train your team to avoid such errors.

Examples of Revenue Leakage in Healthcare

Revenue leakage can happen in many ways in a healthcare setup.

Imagine this: A patient gets treatments and medications, and the bill adds up to $60. The accountant makes a charge capture mistake and writes $10 instead of $60. Unless the error is corrected, the patient will pay less and cause a significant loss to the hospital.

Here is another scenario: A patient gets a service on credit and promises to pay within two months. After this period, the hospital fails to follow up, and the patient fails to honor. Or, the hospital follows up with the patient, but the patient cannot pay due to financial issues. If the same situation happens with many patients, the hospital could easily experience significant revenue leakage.

How Big of a Revenue Opportunity Do These Leaks Present for Providers?

Revenue leaks in the healthcare industry can arise from various sources, but the consequences remain consistent: hindered growth, unmet targets, and financial losses. Instead of addressing the aftermath of revenue leakage, you can proactively improve your documentation processes to prevent such issues from occurring. Here are four common ways revenue leakage deprives healthcare providers of significant revenue opportunities.

Revenue opportunity from denials

According to Change Healthcare, denials create a permanent loss of about 3% of the total net value, even though 90% of the denials are preventable.

Most healthcare facilities also spend an average of $25 for a denied claim, meaning there's still revenue loss if you try to appeal the denied claims. It's much better to fix the claims through proper documentation and follow-up to avoid the denial from happening in the first place.

Revenue opportunity from underpaid claims

According to a recent study, most insurers underpay providers by an average of 7% to 11%, meaning most healthcare organizations are not fully compensated for their services.

Another study implies that underpayment errors cost healthcare providers $17 billion annually. Although you may not wholly avoid payer underpayments, you can minimize them by improving documentation and coding accuracy.

Revenue lost due to charge capture inefficiencies

Most charge capture mistakes happen because of human error and cause healthcare organizations to lose 1% of their net revenue. An average facility loses up to $125,000 yearly to charge capture processes.

To minimize charge capture inefficiencies in your practice, make sure new employees are thoroughly trained in charge capture and create a clear auditing plan. Most importantly, automate processes like data entry and pricing to reduce human mistakes.

Revenue lost to bad debts

Hospitals that allow patients to pay later may find some patients cannot pay as promised. According to a recent Becker Hospital Review report, many providers write off 49% of patients' financial responsibility as bad debts.

If you allow debts in your hospital, implement effective debt management strategies. You can educate patients about alternative payment methods, such as Medicaid and interest-free loans, and leverage technology. A good example of the latter is real-time eligibility technology, which verifies patients' insurance instantly.

How To Prevent Revenue Leakage in Healthcare

You can't afford to neglect revenue leakage, whether you are a small practice or an established hospital. Once you know where the leaks are happening, you should take action to stop them.

Here are practical preventative strategies to consider.

Implement a robust revenue cycle management (RCM) system

RCM is the process of tracking patient revenue from their initial interaction with the hospital to the time they pay the final balance. Since manually managing the revenue cycle process is challenging, RCM software was created to automate and streamline many workflows. The system tracks the revenue cycle of every patient and identifies any billing issues that could result in revenue leakage.

A good RCM system should be able to:

• Verify insurance
• Create patient bills
• Manage claims submission and denials
• Report payments

Invest in robust RCM software to minimize human errors and increase the efficiency of patient revenue management in your organization.

Conduct regular audits and monitoring

Most coding, documentation, and data entry errors remain unnoticed because of irregular auditing and system monitoring. If you go too long without checking your systems for accuracy and compliance, you may risk revenue leakage through minor mistakes.

A thorough audit of coding, documentation, and data entry practices is crucial to minimize revenue leakage caused by errors or omissions. This helps identify mistakes before they cause any financial impact, allowing healthcare organizations to improve overall revenue cycle management. While an in-house team can conduct the audit, external auditors can also be hired to achieve the best results.

If your organization has experienced a revenue leakage before, conduct an audit to determine the damage. A complete audit will help you identify the problem and what you can do to prevent it from recurring.

Create a revenue leakage audit checklist to identify all areas with a higher chance of causing revenue leakage. Is it in your charge capture, documentation and compliance, or insurance claims? If possible, automate your systems for better auditing.

Educate staff on proper coding, billing, and documentation

Missing data and invalid codes are documentation mistakes often caused by human error. Educate your staff on the proper coding and billing processes, even if you intend to automate most processes. The training should be ongoing to keep your employees updated about current issues and how to prevent them.

Negotiate favorable contracts with payers and providers

Payer contracts are integral in increasing a healthcare facility's patient base. Negotiating for a more favorable contract can improve your revenue potential, allowing your patients to enjoy better care and reducing the risk of revenue leakage.

You can utilize payer contract analytics to support your negotiations and stand a higher chance of getting a favorable contract. The analytics provide real-time data to show that you can deliver and that your hospital is worth the payer contract. A successful negotiation should help you reduce operations expenses and increase revenue.

Leverage denial management and underpayment detection software

Insurance denials and underpayments are not easy to deal with. If you experience an issue with denials or underpayments often, you can leverage denial management software to prevent many errors that cause denials.

Insurers are always keen on details, and a simple mistake in spelling or coding can lead to a denial or underpayment. Technology is more effective and accurate than humans, and denial software can help you automate the processes so that your employees focus on other equally important tasks.

Provide patient estimates and increase upfront collections to reduce bad debt

With the help of reliable patient cost estimate software, you can improve price transparency and increase patient collections. The software lets you create an estimate so that patients know the expected amount for the service, the upfront fees to pay, and more.

This software reduces misunderstandings between the hospital and patients, meaning fewer bad debt risks.

Seal Reimbursement Leaks With RevFind

Revenue leakages can go unnoticed and create a huge loss of revenue over time. Don't allow those leaks to affect your facility or patient relationships. Integrate MD Clarity's RevFind software to automatically track payer underpayments, analyze them, and appeal on time to increase revenue recovery. Book a demo today to get started.