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July 02,2001 Issue
Special Report
Revenue stopper: Bungled billing system conversions are plaguing the hospital industry
By: Mary Chris Jaklevic
Like many hospitals and healthcare systems, University of Chicago Hospitals rushed to install Y2K-compliant patient accounting software. The goal was to protect the system's precious cash flow by ensuring that it could continue to bill for services and collect revenue without a hiccup after Jan. 1, 2000.
And also like many others, the prestigious 533-bed academic medical center discovered that converting to new patient accounting software threw a giant monkey wrench into its delicate revenue cycle.
For about two months after the new system went live in February 1999, the medical center struggled to generate bills. Normally, the academic medical center produces 70,000 claims monthly. The average time it took to collect a payment ballooned from about 45 days to nearly 70. Because the software had not been fully customized and tested, less than 40% of claims that were issued were complete and accurate, according to staff who worked on the project.
The result was a cash crunch, with collections 6.3% below budgeted projections for the 1999 fiscal year. To meet expenses, the hospital took out a bank line of credit, which cost it more than $1 million in interest and delayed some capital projects, Vice President of Finance John Mordach says.
It was not one of the healthcare system's proudest moments.
A familiar problem
Though not widely reported, bungled billing system conversions have clogged cash flows at many hospitals, which often installed new systems to avoid problems associated with the turnover to the year 2000. In the industry, stories abound of patient-accounting departments that were unable to generate bills for months or were forced write off millions of dollars in revenue because data needed to submit a clean claim could not be converted to new software.
Although University of Chicago Hospitals had a strong financial position that enabled it to weather the cash choke, the fiscal impact of billing glitches can be severe, leading to credit downgrades, layoffs and even bankruptcy. Many industry analysts now believe software conversions are at least partly to blame for the industry's recent financial difficulties.
Converting patient accounting software has always been problematic, but it's become riskier in recent years. First, most hospitals have less cash as a result of Medicare reductions under the Balanced Budget Act of 1997. No longer just an operational headache, a bad conversion can be a financial nightmare. Even a small spike in the number of days it takes hospitals to collect money can drain millions of dollars, eroding investment income and impairing access to capital markets.
``The (Balanced Budget Act) was very good at strangling hospital cash flows. So if you have a 10-day blip in your accounts receivables, that's a crisis,'' says Vince Ciotti, a principal at HIS Professionals in Santa Fe, N.M., a hospital information systems consulting firm that works with the Hunter Group, a St. Petersburg, Fla.-based turnaround firm.
At the same time, slow payments by managed-care organizations, increasing complexity of federal regulations and private contracts and a shortage of coders and other support staff have conspired to slow hospital receivables (See chart, this page). In fact, accelerating and increasing collections were probably the hottest topic at last month's annual meeting of the Healthcare Financial Management Association, the nation's largest organization for hospital financial staff.
HFMA President and Chief Executive Officer Richard Clarke says shortages of qualified billing staff can hamper conversions, because they often require already-overloaded staffs to operate two systems simultaneously. ``You will find almost every time a healthcare organization does a conversion, their accounts receivable go up,'' he says.
Botched conversions
The hospital industry has complained in recent years about external factors that have stemmed cash flow, such as delayed payments by managed-care companies and the introduction last year of prospective payment for Medicare outpatient services. Although bungled billing conversions also can have a devastating impact, hospitals are usually mum when they occur. In fact, University of Chicago Hospitals was among the few organizations that agreed to allow its staff to talk about the problem with Modern Healthcare.
Only recently have some botched conversions come to light, as they have factored into credit downgrades and bankruptcies. Some recent disclosures show that the problem has hit hospitals of varying size, location and financial strength:
* Crouse Hospital in Syracuse, N.Y., which filed for bankruptcy protection in February after laying off workers last fall, blamed its difficulties largely on a software installation that paralyzed collections. Standard & Poor's reported in January that Crouse had just $4 million of cash on hand, enough to cover eight days of operating expenses.
* A problematic billing system conversion factored in last year's bankruptcy filing by 369-bed South Fulton Medical Center in East Pointe, Atlanta, according to sources involved in the bankruptcy proceeding. South Fulton was sold to Tenet Healthcare Corp. in April.
* Iglesia Episcopal Puertorriquena, a two-hospital system in Puerto Rico, saw its days in accounts receivable rise to 212 in 2000 from 151 in 1999. S&P, which lowered the system's rating to BB+ in March, says one of the system's hospitals had no cash and owed $2.1 million in bank credit and overdrafts.
* Roger Williams Medical Center in Providence, R.I., is implementing its second new billing system this year after an initial software installation caused a cash-flow problem, according to S&P, which placed the hospital's BBB+ rating on watch in May for a possible downgrade. To cover operating expenses, the 146-bed community hospital borrowed as much as $6 million under a line of credit, the rating agency said.
As a result, net accounts receivable increased $3.2 million to $20.4 million, or 73.4 days, from fiscal 1998 to fiscal 2000. That compares with a median of 65.9 days in accounts receivable for BBB+ hospitals, according to S&P. Hospital spokesman Brett Davey says the hospital can't comment because of a confidentiality agreement with one of its vendors.
* Cedars-Sinai Medical Center in Los Angles encountered an unexpected rise in receivables related partly to a conversion, according to Moody's Investors Service. Other factors cited were slow payments by managed-care plans and a shortage of coders. The rise in receivables was one of the factors that led Moody's to downgrade the 849-bed hospital's credit rating to A3 from A2 in March. Cedars-Sinai spokeswoman Grace Cheng says the backlog occurred when the hospital upgraded coding software in its medical records department.
Blame management, not software
While some hospitals blame software vendors at least partly for their problems, experts interviewed by Modern Healthcare say hospitals can avoid pitfalls by choosing simple software, redesigning procedures and leaving ample time for testing.
``Ninety percent of the time it's a process issue-hospitals have bought a system they don't understand,'' says Bruce Hallowell, senior director for patient financial services at Inova Health System, based in Falls Church, Va. Hallowell believes the industry could be in for another spate of billing system catastrophes in the next year if hospitals decide to replace or upgrade software to meet new federal requirements under the Health Insurance Portability and Accountability Act of 1996.
``You should know what the system cannot do for you in advance, so you can develop manual procedures to enable you to perform that function, or you can buy a supportive (software) system,'' says Michael Kreitzer, a Lake Bluff, Ill.-based consultant who specializes in designing healthcare financial information systems.
Nevertheless, there is a move afoot to hold vendors at least partly accountable. Froedtert Memorial Lutheran Hospital in Milwaukee had a nearly flawless conversion with no increase in accounts receivable when it went live with a new patient accounting system in May 1999. The 472-bed hospital allowed ample time for testing, trained staff on the system before it was implemented, and in a novel move, withheld a percentage of payments to its consultants and the software vendor, QuadraMed, until six months after implementation. Payments were withheld to ensure that financial and operational targets, which included improving bill collection times and increasing the percentage of clean claims, were met.
The hospital's chief information officer, Rodney Dykehouse, says he doesn't think every hospital, particularly if it's small, has the leverage to negotiate such an arrangement. Still, he believes the payment system helped to make the conversion a success. ``(The vendor) should be able to commit that the system will work the way it's designed,'' he says.
Kreitzer, the consultant who worked on the Froedtert conversion, says he's been paid on a similar incentive plan at three subsequent installations. He believes this method aligns everyone's goals and encourages vendors and consultants to stick around after software is installed instead of shifting attention to the next project.
Such an incentive system is being considered at the University of Chicago Hospitals. For its next software upgrade in 2002, the medical center will try to withhold payments to the vendor if there are billing delays or a drop in cash, and will hire a full-time project manager, Mordach says.
University of Chicago also is revamping its revenue cycle procedures. For example, Mordach is leading a cross-departmental team to identify problems that hold up outpatient bills, which represent 35% of revenue.
Mordach says the outpatient billing project is the result of the medical center recognizing that installing new software won't fix the revenue cycle. ``You have to re-engineer,'' he says.
Modern Health Care
-- Anonymous, July 23, 2001
Paracelsus Healthcare, a Houston-based hospital chain, has filed for Chapter 11 bankruptcy
The Kennett Square, Pa.-based nursing home chain is still trying to crawl out of bankruptcy
Province Healthcare Co., Brentwood, Tenn., agreed to acquire 75-bed Ashland (Pa.) Regional Medical Center for $4 million only after not-for-profit Ashland rinsed off $10.7 million in debt by filing for bankruptcy.
Response Oncology, Memphis, Tenn., declared bankruptcy in March
The bankruptcies of Genesis Health Ventures, Kennett Square, Pa.; Integrated Health Services, Sparks, Md.; Mariner Post-Acute Network, Atlanta; Sun Healthcare Group, Albuquerque; and Vencor, Louisville, Ky., practically shut off financing for the whole nursing-home industry, Kramer said. Genesis and Vencor, now known as Kindred Healthcare, have both emerged from bankruptcy protection as reorganized companies.
South Cameron Memorial Hospital in Cameron, La. The hospital filed for Chapter 9 bankruptcy protection in November 1999
With five hospital closures as of the beginning of this month, Ohio is on track to exceed the number of hospitals-six-that closed last year. Ohio's record number of hospital closures is eight in 1996.
The most recent hospitals to have closed their doors were 108-bed Mercy Hospital Hamilton and Columbus Community Hospital.
Columbus Community closed after failing to turn around operations under Chapter 11 bankruptcy protection.
At Mercy Hamilton, officials were projecting a $39 million loss over the next three years, according to a written statement released when the closure was announced in March.
``No institution can absorb these kinds of losses,'' said Thomas Urban, the hospital's president and senior vice president of healthcare delivery for parent Catholic Health Partners of Cincinnati.
All five hospitals closed because of financial losses, which contrasts with the planned closures of the early to mid-1990s when hospitals consolidated after mergers, said Mary Yost, vice president of the Ohio Hospital Association. Beyond the losses, no single factor links the shuttered hospitals. They were urban, rural and suburban facilities of varying sizes, Yost said.
Mercy Hamilton's closure left Hamilton, population 62,000, with one acute-care facility, 135-bed Fort Hamilton Hospital, owned by the Health Alliance of Greater Cincinnati. Hamilton is 30 miles north of Cincinnati.
Mercy Hamilton's closure brings to three the number of Cincinnati-area hospitals that have closed in the past three years. The Mercy Foundation, operated by Mercy Hamilton's sponsor, Cincinnati-based Sisters of Mercy, will continue to provide financial support to a primary-care clinic in Hamilton.
Fort Hamilton has hired 152 new employees since March and is building a new emergency room to nearly double its capacity. ``We've seen huge increases in volume,'' said James Kingsbury, president and chief executive officer of Fort Hamilton Healthcare Corp., the greater Cincinnati subsidiary that oversees the hospital. ``Medical-surgery admissions are up 66% over last April, emergency room admissions are up 35% and inpatient operating volume is up 38%,'' he said. Mercy Hamilton's closure ``has been very positive for us.''
Mercy Hamilton was a victim of its need to control costs and Fort Hamilton's growing market share, Kingsbury said.
Lynn Olman, president of the Greater Cincinnati Health Council, the region's hospital association, said Cincinnati's hospitals receive some of the lowest Medicare reimbursement in the country. ``We've been a low-cost area traditionally and consequently a low payment area,'' Olman said. ``When the cuts came in Medicare, we weren't able to absorb them because we didn't have as much fat as hospitals in other parts of the country.''
PMH on Feb. 1 announced that it filed for Chapter 11 bankruptcy
Genesis Health Ventures, Kennett Square, Pa., has filed a reorganization plan with the U.S. Bankruptcy Court in Wilmington, Del., but it has not yet emerged from Chapter 11 protection
Post-Acute Network, a long-term care and assisted-living company that subsequently filed for bankruptcy protection in January 2000
Alexander Community Hospital, Taylorsville, N.C., closed for 90 days on July 7 because of financial troubles and a lack of patients and staff, hospital officials said. The hospital's board voted to close the 39-bed facility temporarily until a decision can be made about its future. The board also said it would consult with a bankruptcy lawyer to consider options including reorganization, downsizing or permanent closure.modernhealthcare
-- Anonymous, July 23, 2001
Hospital closure pace still high
By: Mary Chris Jaklevic
Meager operating margins and rampant competition in some markets continue to eat away at the hospital industry, which is experiencing closures at a rate that matches last year's brisk pace. The shutdowns are occurring despite reports of higher demand for acute-care services.
Research by a private consulting firm and Modern Healthcare shows that at least 23 hospitals either have announced plans this year to end inpatient acute-care services or have shut their doors since Jan. 1. Forty-four hospitals closed during all of 2000, according to a list compiled by Modern Healthcare and published earlier this year (Jan. 8, p. 52).
Meanwhile, recently released government numbers show that hospital closures reached a 10-year high in 1999, with 64 hospitals ending acute-care services in that year (See chart).
The majority of recent closures affect urban hospitals, mainly in overbedded markets of the Midwest and Northeast such as Ohio and New Jersey. The closures have eliminated about 4,200 staffed beds and more than 13,000 employees, although some beds and employees were shifted to other facilities, according to Cleveland-based Dynamis Healthcare Advisors, which released its midyear hospital closure report exclusively to Modern Healthcare.
Dynamis tracked 24 closures or announced closures so far this year. That compares with 20 reported midway through 2000, according to Dynamis.
The firm used a broad definition of closure. Two hospitals on the list announced closures but have since said they reversed those plans under new ownership. The list also includes Cleveland Clinic Hospital in Fort Lauderdale, Fla., which is relocating to a new building. The list did not include two closures that were reported by Modern Healthcare.
Still, the numbers indicate significant closure activity, even as hospitals in many markets are struggling to meet increasing inpatient demand. In many cases, closures reflect efforts by healthcare systems to reduce overhead by consolidating services.
``I think the industry is continuing to get pressure from the (bond) underwriters to take nonperforming assets and get them closed or sold,'' said Scott Keller, a principal at Dynamis.
Overall, closures have a mixed impact on the industry, said Bruce Gordon, a senior vice president at Moody's Investors Service.
Closures can benefit other hospitals in the market by increasing their volumes. For example, Catholic Healthcare Partners' decision to close 108 bed-Mercy Hospital in Hamilton, Ohio, will allow the system to consolidate services at its other hospital in that market, Gordon said. In the long run, the move will benefit the system's credit profile, he said.
But unlike in 1999, when the average occupancy of closed hospitals was less than 40%, according to HHS, closures increasingly hit hospitals with significant volume, and the remaining players sometimes cannot pick up the slack. For example, hospitals in Rochester, N.Y., may have difficulty caring for patients who otherwise would have gone to 269-bed Genesee Hospital, owned by ViaHealth. He said hospitals in the market will face higher costs in the short term because they will have to pay a premium for nursing staff.
Meanwhile, hospitals in Washington could face higher indigent costs as a result of the closure of D.C. General Hospital, a 250-bed public facility, in June. ``From a financial standpoint, that's not a plus for those remaining hospitals,'' Gordon said.
In addition, Gordon believes reports of closures, as well as bankruptcies and defaults, have scared away some potential bond investors, which drives up borrowing costs because of the perceived risk of the industry.modernhealthcare
-- Anonymous, July 23, 2001