The Importance of Revenue Cycle Management and Its Impact on Your Quality of Earnings Report

Written by Grayson Terrell, CPA, Brad Witt, CPA, and Joe Scott, CPA

What is Revenue Cycle Management?

Revenue cycle management (RCM) is a critical financial process adopted by healthcare institutions to effectively oversee the administrative and clinical aspects related to claims processing, payment collection, and revenue generation. This comprehensive process covers the identification, management, and collection of patient service revenue, and is essential to ensuring the continuous operation of medical practices while prioritizing patient care. The RCM process is initiated the moment a patient schedules an appointment. To ensure its seamless operation, healthcare facilities must prioritize front-end optimization, thereby reducing errors and complications that may hinder the reimbursement process and result in claim denials.

Necessary Considerations for RCM System Selection

When selecting an RCM system, healthcare organizations must conduct a comprehensive assessment of the reporting capabilities of each system. Evaluation should include factors such as the implementation and management of payor contracted rates within the system, as well as the quality of the reporting outputs of the system. It is imperative to the efficiency and accuracy of the quality of earnings (QofE) process that the management team of a company is well-versed in the capabilities of their RCM system. It is also vital that they are familiar with the reports that can be generated to effectively illustrate their revenue performance and key metrics. This will not only assist with the QofE process but will give management better insight into the key performance indicators (KPIs) of their business which can drive efficiency and growth. Fostering a strong relationship with the selected RCM’s customer relations team is also imperative, as they can provide insight into the preparation of revenue-related QofE requests, as well as assist with preparing custom reports or analyses, if necessary.

Additionally, the management team needs to have a strong understanding of the overall timing of their RCM lifecycle, including how claims are entered into the system, how payments are posted, and if there are any inefficiencies in this process that can be corrected or highlighted for the QofE team. Having a comprehensive understanding of your payor mix, collection timelines, and typical payment patterns will improve both the overall performance of your business and the accuracy of your QofE report.

In cases where the transition to a new RCM vendor is contemplated in the period leading up to commencing the transaction process, practices should be aware that this change could potentially disrupt the timing of revenue cycle activities and the accuracy of data. As a result, this could hinder the quality and accuracy of the revenue analysis within the QofE. A change of this magnitude within the historical period that would be analyzed in the process could preclude the quality of earnings team from performing certain revenue analyses that produce more accurate results. This could ultimately lead to a negative impact on diligence-adjusted EBITDA which could potentially hinder transaction negotiations or result in a re-trade or termination of a deal. Therefore, if such a change must be made in the periods leading up to a transaction, it is imperative to ensure that management teams are aware of any potential impacts on the attainability, comparability, or accuracy of revenue data before and after a system conversion.

Positive Impacts of Quality RCM Practices on Financial Due Diligence Procedures

A fundamental procedure of financial due diligence in many middle-market healthcare deals is the conversion of the reported financial statements from cash-basis to accrual-basis. Strong RCM processes can alleviate the complexities of this transition, making revenue data more accessible and ensuring the quality of that data is up-to-par for the complex cash-to-accrual analyses performed by the quality of earnings team.

If management has an in-depth understanding of the organization’s RCM system, including its reporting capabilities, it can also empower practices throughout the QofE process in the following ways:

• Assists management in providing detailed responses to revenue-related questions posed by the quality of earnings team, which not only facilitates a smoother transaction experience for all parties but also enables a more comprehensive quality of revenue (QofR) analysis.

• Enables the QofE team to perform a cash waterfall analysis which is widely accepted as the most appropriate method of calculating a cash-to-accrual QofE revenue adjustment. Cash waterfall analyses also allow for the proper estimation of accounts receivable by providing detailed insight into a company’s cash flows and supporting net working capital negotiations.

• Enables buyers and sellers of organizations to evaluate significant financial and reimbursement trends.

• Enhances the accuracy of adjustments related to top-line revenues as well as variable revenue-driven general ledger accounts, such as medical supplies expense and physician compensation.

• Allows management and the QofE team to quantify and support the impact of complex proforma adjustments such as payor and rate changes, new and abandoned service lines, and new or departing providers.

A robust and accurate revenue analysis vastly improves the organization’s ability to defend itself against scrutiny from opposing quality of earnings teams during transaction processes, especially with the aforementioned proforma adjustments. Complex revenue-driven proforma adjustments are often the primary focus of opposing QofE teams given that these adjustments tend to be forward-looking in nature and rely on certain assumptions. Therefore, detailed support from an RCM system and/or tangible proof of progress toward achieving future EBITDA is often required.

Conclusion

Whether you are contemplating the sale of a healthcare company or aiming for more efficient internal financial management, gaining a deeper insight into your practice’s RCM processes and system is paramount to the success of your organization. This knowledge directly influences your organization’s financial stability, growth, and, ultimately, its ability to provide high-quality patient care.