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Strong medicine: rethinking the PFS director's role - patient financial services - includes related article on accounts receivable management

Healthcare Financial Management - August 1, 1991

Despite policies designed to ensure payments on accounts receivable within 30 to 60 days, averages for the nation's hospitals hover from 75 to nearly 90 days. (a) Hospital executives know only too well the consequences of languishing receivables. At 250-bed St. John's Regional Medical Center in Oxnard, Calif., administrators estimate that a variance of 90 days could create a loss of more than $8 million in annual gross revenue for the facility, which has an average daily census of 200 and average daily revenue of $300,000.

Not surprisngly, the problem mounts as accounts grow older. U.S. Department of Commere figures show that accounts receivable older than 120 days lose more than 20 percent of their value.

In response to receivables problems, hospitals have turned to numerous revenue recovery solutions and collection system strategies. Some of these services involve hiring reimbursement specialists to teach hospital employees effective collection practices. A new healthcare facilities also have chosen accounts receivable financing programs. Because they focus on employees who have responsibility for a facility's cash function, programs, that emphasize management skills and effective collection training come closer to creating long-term solutions to a hospital's receivables problems. But even the best of these efforts may not be enough.

Most collection solutions, including programs that provide some training, fail to address the key issue underlying a healthcare facility's receivables problem. They ignore the role of the person who manages a hosital's cash function: services (PFS).

Directors in name only

A hospital's PFS director may have the same reporting relationship to the chief financial officer (CFO) as other departmental directors within the finance division, but the PFS director may have a lower status within the organization. In many hospitals, PFS departments are equal to other departments only on the organizational chart.

Problems can arise when PFS directors are directors in name only and limited to duties more often performed by lower level managers. In these cases, they may have responsibility for improving collections but lack the influence to make change happen.

The PFS director at one 700-bed teaching hospital in Southern California describes the position's common perception as "more like a supervisor." The difference lies both in the position's function and in perceptions of that funciton.

Because the PFS department significantly affects a hospital's financial succes, some parallels can be drawn between the roles of healthcare PFS directors and treasurers in other industries. While treasurers generally are assigned a broader scope of responsibility than a typical PFS director, both positions are designed to provide their organizations with working capital, maintain favorable relations with outside providers of cash, manage credit and collections, and handle insurance issues. Despite these duties and their fiscal importance, the qualifications for treasurers generally are much more strict and precise than requirements for PFS directors.

By upgrading the PFS function, hospitals could take a decisive step toward solving operational and procedural problems dogging collection management and performance. Many hospitals experience difficulty in measuring the effectiveness of their collection departments because they cannot determine whether collection problems are caused by collection procedures or by the processing functions that precede them.

Managing a billing system also requires that cash flow objectives be met. Inefficient procedures can cause lapses between initiating a bill and receiving payment. As a result, the time value of accounts receivable diminishes.

In a problem-plagued collection department, the following operational and procedural inefficiencies often exist:

* The department becomes involved with problem accounts too late, missing an opportunity for timely payment. A two-week delay at St. John's is estimated to be capable of clogging the system with as much as $4 million in accounts receivable;

* Collection policies may be out of sync with current economic and contracting conditions. If policies are not reviewed and revised regularly, they become outdated and less effective;

* Collection employees receive inadequate and untimely information, preventing accounts receivable from being processed efficiently and accurately;

* Labor-intensive routines, such as write-offs and collection listings, may not be automated. As a result, employees may spend too much time on unproductive activities;

* Collection policies and procedures often are not outlined in a manual and updated to reflect current conditions. Conditions concerning write-offs, charity care, use of outside collection agencies, delinquent accounts, planned payments, and partial payments should be assigned to collection personnel and monitored for effective performance;

* Adequate management goals are not spelled out, precluding objective measurement of departmental performance;

* At the time of admission, inaccurate information concerning a patient's insurance coverage is collected, perhaps rendering all or part of an account uncollectible. Administrators at St. John's estimate that such a problem could increase its bad debt by 2 percent--or $200,000;

* When billing is late because of missing information, funds tied up in outstanding accounts begin to lose value, a fact that receivables computations generally fail to show.

If a service department does not provide patient charges needed for billing or if medical records are not completed within a designated period, millions of dollars remain idle each day. The hospital, in effect, must fund these outstanding accounts and forgo better returns on its investment. Improved communication and management between departments is critical to healthy cash flow;

* The roles of other hospital departments and physicians' offices in providing complete, accurate, and timely information should be emphasized. Unless the functions and objectives of the PFS department are understood by tose who interact with it, efficiency and productivity can be limited;

* Many hospitals lack a system for stratifying accounts. More often than not, focus is given to particular accounts or classes of accounts, rather than to the billing system used; and

* Many hospitals need a monitoring system to provide information on the status of an account from the time the chart leaves the nursing floor until it is billed. an effective system should minimize collection efforts by placing emphasis on billing large accounts and by expediting the retrieval and collection of information.

Changing role

The role of the PFS director has grown more complex from earlier days when hospitals received payments for usual and customary charges in providing patient care. In those days, managed care contracts had not entered the picture to add more complications, and hospital billing systems were based on receiving full payments for services.

Today's environment of prospective payments, contractual discounts, multiple payers, and many othr variables demands a greater degree of professionalism and sophistication. Despite these developments, hospitals have made few fundamental changes in requirements for PFS director positions, unlike changing criteria used in filling controller, financial planning, or information services posts.

According to a 1991 profile study (b) of patient accounts managers conducted by HFMA, the Chicago, Ill., office of Coopers & Lybrand, and Accelerated Receivables Management, Lincolnwood, Ill., only 54 percent of surveyed PFS directors hold college degrees. The figure represents fan increase of only two percent from the previous survey in 1988.

At the same time, those surveyed identified a maze of issues increasingly complicating their positions and requiring their attention in the years ahead, including government regulations, third-party reimbursement, uninsured patients, and increased deductibles and coinsurance. These demands clearly require a broadened skill level that does not appear to e occurring on its own.

While requirements placed on hospital business offices have changed dramatically in recent years, professional requirements for PFS directors have not. Many processes and procedures used in managing hospital business offices also have grown inadequate or inefficient. This is the crux of the problem. Until the role of PFS director is upgraded to reflect new demands placed on the position, outdated perceptions of PFS directors are unlikely to change.

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