Management of Third Party Payer Payment Denials

• As a result of San Francisco General Hospital’s deficient procedures in tracking, monitoring, and analyzing denials of claims sent to third party payers, including MediCal, Medicare, and commercial insurance company payers, the Hospital does not consistently identify or follow-up on third party payers’ failure to pay claims submitted by the Hospital. For example, San Francisco General Hospital does not summarize and review the reasons that MediCal and Medicare deny payment of claims for inpatient and outpatient services, nor does the Hospital follow-up on the status of appeals of such denials made by the Hospital. As a result, the Hospital is unaware of underlying issues either with its own internal processes or with MediCal or Medicare payment processing. Although San Francisco General Hospital does not summarize and track denials, the Patient Financial Services Division reports that in FY 2001-2002 MediCal uncollectable accounts were approximately $6.6 million and Medicare uncollectable accounts were approximately $8.5 million.
  
  
• By establishing a program to manage denials, San Francisco General Hospital can address inefficient or ineffective processes, reduce reworking of claims, identify third party payer abuses, and pursue legitimate claims for payment.

With health care costs rising rapidly, third party payers are increasingly denying payment for health care services. Payments can either be fully or partially denied for several different reasons, including patient eligibility, lack of treatment authorization, clinical issues, data errors or insufficient documentation. The extent of denials is dependent upon the effectiveness of the billing process and any up-front billing edits that are completed. Further, denials are impacted by the provision of uncovered services. Once claims have been denied or underpaid, health care providers can pursue payment through established appeals processes.

Patient Financial Services Approach to Denials

Patient Financial Services commits significant resources to ensure that claims are acceptable prior to billing major third party payers, such as MediCal, Medicare, and some commercial payers. These efforts are addressed extensively in Section 6 of this report. Because of this front-end edit process, Patient Financial Services significantly reduces the number of denials that would otherwise need to be appealed due to errors in submitted information or insufficient documentation. Once a claim has been billed, therefore, most denials should be caused by issues related to treatment authorization and clinical decisions.

Yet, Patient Financial Services does not have a systematic approach to denial management. Denials and appeals are not tracked. The causes and financial impacts of denials are not determined and the extent and status of appeals are unknown. Policies and procedures do not aid staff in addressing and processing either denials or appeals.

Processing Specific Third Party Payer Denials

MediCal Outpatient Charges

Patient Financial Services bills MediCal for all MediCal outpatient charges even if the edit process has identified that the claim will be denied. Based on the reason for the MediCal denial, the denied claim will either be automatically pursued through an appeals process, billed to the patient, or written-off to charity care. Patient Financial Services receives summary reports of the total of outstanding denied claims for which there has been no action taken. However, denials are not tracked or monitored by reason for the denial or by subsequent action taken.

MediCal Inpatient Charges and Treatment Authorization

Utilization Review has responsibility over obtaining appropriate treatment authorization for MediCal inpatient charges. According to Utilization Review management, there are no established policies and procedures for addressing denials of treatment authorizations. First and second appeals are pursued at the discretion of the individual case managers.

Additionally, Utilization Review does not track denials or appeals. It does track and report "recovered days" for which retroactive authorization has been received from MediCal. However, because this statistic is not measured against total denials, it is not necessarily an indicator of performance.

Medicare Errors and Rejections

Patient Financial Services reports that Medicare denials were numerous not long ago, but process improvements and front-end edits have significantly reduced errors and rejections received back from the Medicare fiscal intermediary. However, to a certain extent, errors and rejections still occur and they are noted in the policies and procedures manual as requiring follow up. They are identified weekly through a system report that is reviewed by a supervisor. Claims are then assigned to staff for follow up. Management reports that Medicare denials are minimal; however, summary data and information on these denials is not compiled or analyzed. Rather, management gauges overall performance in this area by reviewing Medicare inpatient and outpatient account receivables.

Commercial Payers

When commercial payers deny payment, the liability can be transferred to patients if the denial is based on legitimate eligibility or treatment authorization issues. However, collection rates for commercial payers are substantially higher than for self-pay accounts. To the extent that commercial payer denials are illegitimate, the Hospital would benefit from aggressively seeking payment. Yet, denials are not tracked and monitored, and their disposition is unclear.

Importance of Managing Denials and Appeals

In an environment of increasing costs and decreasing revenues, the Hospital must focus its attention on ensuring its operations are efficient and effective, especially in revenue generating functions. According to health care consultant Zimmerman & Associates, denials are a growing problem in the health care industry. The consultant claims that although 90 percent of denials are preventable and 50 percent to 70 percent can be recovered through appeals, health care providers do not follow up on approximately half of their denials. The Hospital does not systematically gather data and information on its own denials or appeals.

Accordingly, the extent to which its denials are preventable, able to be recovered, and are followed up, is unknown.

By tracking, monitoring, and analyzing denials, the Hospital can identify internal inefficiencies or third party payer abuses, reducing the risk that these issues may go undetected. Then, inefficient or ineffective processes can be addressed, rework can be reduced, third party payer abuses can be handled, and legitimate claims can be pursued for payment.

Creating a Denial Management Program

Patient Financial Services should develop a denial management program under the Director of Patient Accounts. Pertinent data and information should be collected on all denials and appeals. A database would allow in depth analysis, including the reasons for and financial impacts of denials. Appeals should also be tracked, monitored and analyzed. The information gathered should be utilized to set goals, priorities, and accountability within individual Patient Financial Services units.

Patient Financial Services should also establish written policies and procedures for the denial management program. Procedures should include how staff should address denials, how and when the appeals process should be utilized, and how and when denials should be written-off to bad debt or contractual adjustments. The policies and procedures should also include instructions on the denial management program itself, covering data collection and analysis of denial and appeal information.

Because Utilization Review does not report to Patient Financial Services, it should develop its own similar program for managing treatment authorization denials.

Conclusions

With costs rising rapidly, third party payers are increasingly denying payment for health care services. Payments can either be fully or partially denied for several different reasons, including patient eligibility, lack of treatment authorization, clinical issues, data errors or insufficient documentation. However, the Hospital does not systematically track, monitor, or analyze third party payer denials. Subsequently, the Hospital risks undetected increases in denials due to internal inefficiencies or third party payer abuses. Accordingly, the Hospital may not be maximizing reimbursements or the efficient use of its resources.

Recommendations

Patient Financial Services should:

Costs and Benefits

Minimal one-time and on-going costs will be incurred for establishing a denial management program and developing written policies and procedures. However, existing resources should be used, the savings resulting from efficiencies in the process and the resulting increased reimbursements from third party payers should significantly exceed the costs to implement our recommendations.

1. For purposes of this report, denials include disputed underpayments for services, which is particularly relevant for commercial payers.
2. Zimmerman & Associates, Revenue Cycle Consulting Group, "2002 Best Practice of Revenue Cycle Operations