©2011 Chi Solutions, Inc. Proprietary and Confidential.

Executive War College 2011

Why Your Hospital Lab Outreach Program Leaves Big Money on the Table: Six Ways to Boost Net Revenue and Net Profits

Presented byKathleen A. Murphy, PhDChief Executive Officer

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BasisData from 9th Annual National Outreach Survey (2010)Experience as a lab executive in hospital and independent labsKnowledge gained from working with clientsInterviews

Tom Hirsch of Laboratory Billing SolutionsJohn Leskiw of Quadax

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9th Annual National Outreach SurveyPrimary Outreach Program Weaknesses

PRIMARY OUTREACH PROGRAM WEAKNESSES

Billing and collections is always among the top five weaknesses in this survey.

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9th Annual National Outreach SurveyProfitability Data

CoreLaboratory (8)

Stand‐AloneHospital Laboratory (39)

% Contribution Margin % Contribution Margin

MaximumUpper QuartileMedianLower QuartileMinimum

Average (Mean)Standard Deviation

43.0%39.3%24.0%8.0%2.0%

23.3%20.3%

53.0%30.0%15.0%10.0%3.0%

20.3%15.1%

MaximumUpper QuartileMedianLower QuartileMinimum

Average (Mean)Standard Deviation

$17,000,000$10,101,374$3,200,000$2,162,660$1,400,000

$6,589,724$5,928,821

$70,795,982$9,649,388$5,571,402$2,452,363$150,000

$9,075,893$13,451,086

Range of profitability from 15 to 25 percent with core labs generally higher than stand-alone labs.

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9th Annual National Outreach SurveyContribution Margin - Last Six Years

Stand‐Alone Hospitals Core Laboratories

Are margins being squeezed?What can you do to counteract that trend?

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9th Annual National Outreach SurveyType of Billing Service Utilized

Hospital Financial Billing Department Using HIS

79.3%

Lab‐Specific Application and Service

13.0%

Contracted OutsideBilling Service 

7.6%

Most of my comments today are focused on the 79 percent of outreach programs where the hospital does the billing.

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9th Annual National Outreach SurveyBad Debt and DSO

Bad Debt Rate

MaximumUpper QuartileMedianLower QuartileMinimum

Average (Mean)

11.0%7.3%4.0%2.4%1.0%

5.0%

Know the Bad Debt RateDon’t Know

27.3%72.7%

Days Sales Outstanding (DSO)

MaximumUpper QuartileMedianLower QuartileMinimum

Average (Mean)

11049413226

45

Know the DSODon’t Know

29.4%70.6%

73 percent and 71 percent of outreach programs do not know their bad debt or DSO.

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9th Annual National Outreach SurveyBad Debt and DSO Over Six Years

Bad Debt Days Sales Outstanding (DSO)

For those who know this information, performance has been trending better over the last few years.

In Reverse Order of SignificanceFrom Six to One

Reasons Why $ is Left On The Table

Top 6 Countdown

NOT FIRING“BAD” CLIENTS

Reason #6

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#6 Not Firing “Bad” ClientsAll business is not “good” businessNeed systems to measure profitability by clientCase study - Midwestern Hospital

Profitability By Client - Rank Order

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Midwestern Hospital

Many of the Top Revenue Clients Were Unprofitable

AfterProfitability of $1M

Raised client pricing or dropped client within 60 days

Limited service area to reduce courier costs

Reduced client base by 30%

Dropped many of largest clients

BeforeLosing $400K annually

Client pricing

Cost of couriers

Large service area

Confusing revenue with profitability

Impact

Shift of $1.4M in Profitability

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Reason #5

TAKING “CAST-OFF”FROM NATIONAL LABS

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#5 Taking “Cast-Off” from National LabsToo good to be true?Beware of:

Missing or incomplete billing or demographic informationCollection problemsCompliance issuesLow volumeLacking IT skillsLow margin business

Case study

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“Cast-Offs” Were Not Profitable

Case Study: Mid-Atlantic Health System

Physician Office Business Before After

Revenues 4,012,986 3,050,089 Expenses 4,194,799 2,229,072

Contribution Margin (181,813) 821,017 Contribution Percent (5) 27

Nursing Home Business

Revenue 931,058 -Expenses 1,288,958 -

Contribution Margin (357,900) -Contribution Percent (38) -

TotalContribution Margin (539,713) 821,017 Contribution Percent (11) 27

Total Change of

$1.4M!

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WRITE-OFF BALANCETOO HIGH

Reason #4

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#4 Write-Off Balance Too HighWrite-off balance for many hospitals is $50For labs, should be $3 to $5 (difference of tenfold)Typical co-pay or deductible ranges from $25 to $48What does this mean to an average lab?

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#4 Write-Off Balance Too High

Example Calculation of Lost Money from Write-Offs

Typical lab has a co-pay/deductible on 20 percent of patientsA lab seeing 1,000 patients per day will have 200 patients getting an average bill of $35

$35 x 200 Patients x 260 Billing Days/Year = $1.82M Lost to Write-Offs*

Can you afford to leave that on the table?

*Data from Laboratory Billing Solutions.

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UNTIMELY FOLLOW-THROUGH ON MISSING BILLING INFO

Reason #3

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#3 Untimely Follow-Through—Missing Billing InfoShould be within 24 to 48 hoursPercent collection is disproportionate to time to follow up

After 60 to 90 days, likelihood of getting information from physician office or patient goes downMay exceed filing limits (90 days for most commercial payors)DSO goes up (25 to 30 days for national labs versus 50 to 110 days for hospital labs)Collection rates go down

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Reason #2

NOT WORKINGDENIALS

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#2 Not Working DenialsPercent denials varies by lab; estimated at 10 to 30 percent on average*Common in hospital settings; some hospitals do not follow up on denials; see the next example for financial impact

*Data from Laboratory Billing Solutions and Quadax.

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#2 Not Working Denials

A lab seeing 1,000 patients per day will have claims from 10 to 30 percent (100 to 300) of patients denied

No. ClaimsDenied

RevenueLoss1 Daily Loss

BusinessDays Annual Loss

100 $68 $6,800 260 $1,768,000 200 $68 $13,600 260 $3,536,000 300 $68 $20,400 260 $5,304,000

RevenueLoss2

100 $34 $3,400 260 $884,000 200 $34 $6,800 260 $1,768,000 300 $34 $10,200 260 $2,652,000

Working denials makes a material difference in the revenue and profitability of an outreach program.

Example Calculation of Not Working Denials

1Assumes total claim denied.2Assumes 1/2 claim denied.

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MANUAL REQUISITIONSVERSUS ONLINE ORDER ENTRY

Reason #1

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#1 Manual Requisitions Versus Online Order EntryThe most successful labs have online order entry for 80 to 90 percent of client base

AccuracyCompletenessTimelinessNo denialsNo re-work

Outcome:

COSTSDOWN

PROFITABILITYUP

REVENUEUP

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Want Some “Free” Money?

Working Denials

Reduce Write‐Offs

No Cast‐Off from Nationals

Firing "Bad" Clients

1Example lab with 1,000 requisitions per day or 13 to 15M in annualized net revenue.2Does not include impact of timely follow‐through on missing information or computerized order‐entry.

This slide is meant to be hypothetical. We recognize that it is unlikely that any one lab will have all these problems…

$8

$6

$4

$2

$0

Computerized OE2 ?Timely Follow‐Through Missing Information2 ?

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How Can Things Be So Bad?

Part of theBigger Picture

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9th Annual National Outreach SurveyAccess to Information - Key Performance Indicators

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Information to Manage Your Business

Do you have the information, management reports, and key performance indicators to manage your business?

Yes33.3%

No66.7%

Most lab executives today are managing multi-million dollar businesses by “Braille.”

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Margins are too thin to manage by Braille!

The Solution: Run Like a For-ProfitInformation, systems, tools to manage your businessPerformance metricsControl chartsThink and act like a for-profit

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Planting the Seeds…

Apply What You Learned Here Today and Watch Your Lab Business Grow!

Kathleen Murphy, PhDChief Executive OfficerOffice: (978) 777-9766Mobile: (617) 306-6671kmurphy@chisolutionsinc.com