The ins and outs of billing: Pros and cons of outsourcing

Whether you handle patient billing or hire an outside firm can have a big impact on your practice's bottom line -- and not necessarily a good one. Here are some things to consider before deciding on in-house versus outsource.

By Larry Stevens amednews correspondent — Posted April 16, 2007

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For many doctors, the choice to outsource billing is not like, say, hiring someone to mow the lawn: You could do it if you wanted to, but you have better things to do. It's more like having a plumbing emergency: You find yourself with a crisis -- or at least a persistent leak -- and you need professional help.

Take Marc D. Grobman, DO, a solo internist at Internal Medicine and Primary Care in Wilmington, Del. He had been an employee of a hospital-owned practice until June 2001, when he purchased the practice. Suddenly he found himself having to staff up quickly, and he realized, "Finding and hiring someone who could hit the ground running with billing would have been very difficult."

So Dr. Grobman decided to take what he considered to be the easier and safer road. He hired Health Care Practice Management Inc., a billing service and billing consulting firm, to handle his billing. Initially, when his office couriered the paper superbills to the billing service, the company charged him 10% of revenue. Dr. Grobman gradually began to bring in new technologies, including a system that allows his staff to enter the billing data and send them electronically to the service, so the fee has dropped to 8%.

Dr. Grobman would prefer to hang on to that extra percentage. But his accounts receivables arrears is less than 5%, compared with the 7% he says is a national average for his specialty. In addition, he says he is getting 98% of money due compared with 75% when he was part of the hospital network. "At first [using a billing service] was a virtual necessity. Now I see no reason to bring it in-house because it's working out so well," Dr. Grobman says.

The Healthcare Billing and Management Assn., the industry trade group for medical billers, estimates that about one-third of practices use an outside billing service, with that number growing. The question whether to hire a biller often rests on whether the cost of the service is a better deal, financially and otherwise, than handling billing in-house. But the question also rests with assessing the reputation of the biller. Given that the company is an extension of your practice, are you comfortable with it representing you? And how do you make sure it can do what it promises, and collect more of your bills than you can?

Bob Burleigh, president of West Chester, Pa.-based Brandywine Healthcare Services, which consults with both physicians considering using a billing service as well as with the billing services industry, says the default position for office-based doctors is to do billing in-house. (Hospital-based doctors, such as radiologists, who have little or no staff, often find they have no choice but to farm out the billing process.)

Burleigh says that until 10 or 15 years ago, very few office-based doctors outsourced billing. But more recently, many find themselves overwhelmed by business changes such as increased coding complexity and higher patient out-of-pocket fees because of health savings accounts, high-deductible insurance policies and higher co-pays. In addition, flat or even decreasing revenue pushes many practices to seek ways to make their billing processes more efficient. Finally, technology, primarily the Internet, has made it easier for groups to communicate with and share data with billing services.

Still, most office-based doctors like the control of in-house billing. They often have a closer relationship with their billing staff than they could get with an outsourced service, and they like the flexibility of having staff available for other administrative functions. And many practices have loyal employees who have been doing excellent work for years, and doctors have no intention of letting them go.

Additionally, many doctors believe they can maintain a better relationship with patients when billing inquiries are handled in-house.

Given doctors' general reluctance to farm out billing, Burleigh says, "Most practices only consider using a billing service when something has broken down in the in-house process."

For example, the billing clerk might have left; the group may suspect embezzlement; the practice may be faced with the need to upgrade a computer system, and the doctors want to avoid the expensive license fees and the disruptive training the new system would require; or the group may find that its collections are trending in the wrong direction.

Of all the factors that impact doctors' decisions about outsourcing billing, however, one of the most important is cost. Billing services charge from about 3% to 10% of revenue, depending on what services they provide and the average charge per medical encounter.

But Philip Schwartz, MD, a solo rheumatologist in Wilmington, Del., points out that the fee is actually somewhat higher than the actual net cost of doing it yourself. "There's always a cost to billing as there is with everything you do in business. The question is not whether you're going to pay to do it, but who you will pay: your billing clerk or an outsource service," Dr. Schwartz says.

Dr. Schwartz hired Health Care Practice Management to do his billing when he bought a practice that the company was already serving. Dr. Schwartz acknowledges that there's no definitive way to calculate the actual cost of doing billing in-house. "There are so many hidden variables," he says. For example, he points out that it's almost impossible to calculate the cost of running and upgrading software, training staffers, finding ways to handle vacations and family leave, and other disruptions. And even if the group is lucky enough to have someone who is expert at billing, it's leaving itself exposed to the risk of catastrophic failure if the person leaves unexpectedly.

While the net cost of farming out billing is unknowable, Dr. Schwartz does believe that whatever it is, it's worth the peace of mind it gives him. "An outsource service insulates us from the kinds of problems that could get us into financial trouble," he says.

Skip Balkenbusch, practice administrator at 32-doctor Associated Anesthesiologists of Fort Wayne, Ind., agrees that you can't calculate the exact cost of in-house billing. But with careful analysis, he says, you can determine how successful your in-house billing efforts are.

To determine if his practice was having a problem, Balkenbusch considered several key indices. "We were looking for an objective way to judge the efficacy of our own billing job and that of billing services we might consider working with," he says.

Accordingly, Balkenbusch gathered data about his practice including the following:

  • Accounts receivable: average number of days in accounts receivable; average monthly charges compared with total receivables.
  • Collections: gross and net.
  • Encounter averages: charges per encounter and payments per encounter.
  • Bad debt: amounts and ratios of charges sent to collections.

He compared these factors internally (year over year); with other groups in his specialty; and with Medical Group Management Assn. benchmark data. "We found we were inefficient in this regard. And for a business not to be able to effectively collect the money it's owed, that's serious," Balkenbusch says.

Choosing a good service

Deciding that a group might benefit from a billing service is a far cry from selecting the right one. Even some billing service executives acknowledge that the industry has a less than stellar reputation, based on the propagation of suspicious home-based billing schemes. Says Balkenbusch: "I realized when I started looking to hire a billing service company that there are many that I want to stay far away from. And the biggest challenge was to identify the few vendors who do a credible job."

He adds that the wrong decision in this regard can virtually spell a disaster that would be hard to recover from. "It's not the kind of decision that can be easily reversed, since once you get going, you're tied in pretty closely with the vendor," Balkenbusch says.

Before eventually hiring billing company Ciproms Inc. in Indianapolis, Balkenbusch started his evaluation with the obvious: checking references, asking other practices for recommendations, finding out how long each prospective company had been in business, seeing how many employees each company had, and so on.

But he also did some less conventional analysis. For example, he asked each firm on his short list to reveal how they fared with the same benchmarks he used to evaluate his group's billing efforts. In addition, he interviewed the billing service company employees without their supervisors present. "When you interview three or four people in an organization, you get a good idea of the company's culture, their attention to detail, their reliability, turnover and other things that would impact us."

Another issue to consider is how billing companies treat your patients. A service provided by many firms is to represent themselves as part of the medical office. They give each practice its own toll-free number for patients to call with questions. Like an answering service, the billing company will answer the phone with the name of the practice. If the billing company representative isn't courteous, patient and helpful, the poor service will reflect on the physicians' office. So consultants suggest doing a bit of "mystery shopping" with your billing service company to ensure that it is representing your office in the best possible light.

Opting to use a billing service and then selecting one is a difficult and somewhat risky venture. So the advice many consultants offer physicians is "if it ain't broke don't fix it." But if your best billing clerk just left, or you find you're trending downward against accounts receivable benchmarks, or in general find yourself in a billing crisis, a billing company may be your best and most cost-efficient option.

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Doing it yourself: Select the right billing software

Billing software offers a means of ensuring efficient collections. The AMA and the Kentucky Medical Assn. collaborated on a guide for physicians to help ensure that they get the right software for their practices. They outline a four-step process:

1. Establish a billing software assessment team. Get the key staff who use, or are affected by, the claims-management process to analyze the practice's needs, determine the most important features, determine the reports needed and determine vendor requirements.

2. Analyze the claims-management process. The assessment team should answer questions involving how appointment setting is handled, how claims are filed, when charges are put into the system -- everything that happens between the patient making an appointment and the bill being sent. This step also would look at the practice's payer mix, recording of authorization and referral numbers, patient and accounts receivable tracking, and auditing tools.

3. Gather recommendations. The assessment team should talk to other practices about their billing software -- what worked, what didn't and why.

4: Request proposals from software vendors. The team should request that vendors submit a written proposal for meeting practice's software requirements. The request should cover what the office wants from the vendor in terms of installation, hardware, software, training and support. Practices can compare proposals to determine which vendor would best meet its work and cost requirements.

Source: American Medical Association, Kentucky Medical Assn.

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