In House or Outsourced Medical Billing: Which Model is Right for your Medical Practice?

The decision to change an existing medical billing model should not be taken lightly. After all, it’s only cash flow right? Even the best case scenario involving a change to/from an in-house or outsourced medical billing model will involve some degree of short term cash flow disruption and we won’t even bring up the worse case scenario.

A health care provider’s first step is to determine whether or not his/her current medical billing model is achieving the desired financial result. Although financial analysis is beyond the scope of this discussion, the provider, accountant or other financial professional must be able to compare actual financial data to revenue and operating budgets. Assuming the integrity of the practice’s financial data is intact though accurate and timely data entry, the provider’s medical billing software should possess the capability of generating actionable management reports.

In the end, basic financial analysis will shed light on the strengths and weaknesses of the provider’s medical billing model. Some things to consider when evaluating a medical billing model: the inherent strengths and weaknesses of in house and outsourced medical billing models; the provider’s practice management experience & management style; the local labor pool; and medical billing related operating costs.

In House versus Outsourced Medical Billing Models

No medical billing model is without unique advantages and pitfalls. Consider the in house medical billing model. Approximately one third of independent health care practices utilizing an in house medical billing model experience cash flow issues ranging from periodic to persistent. The degree of action required by a provider to resolve his/her cash flow issues may range from a simple adjustment (adding staffing hours) to a complete overhaul (replacing staff or switching to an outsourced medical billing model).

The provider with an under performing in house medical billing model has a clear advantage over the provider with an under performing outsourced (also known as third party) medical billing model: proximity. An in house medical billing model is within walking distance. A provider has the opportunity to observe, assess and address – observe the process, assess the system’s strengths and weaknesses and address issues before they become full blown problems.

Consider the provider with an outsourced (also referred to as “third party”) medical billing model. The relatively low entry barriers of the third party medical billing industry have led to a proliferation of medical billing services scattered throughout the United States. Chances are the provider’s medical billing service is located in another geographic area making first hand observations and assessments impossible.

The role of management reporting in a third party medical billing model is critical. A provider must regularly review charge entry, posting, write offs and account receivable balances to insure his/her cash flow is properly managed. A report as basic as 30, 60, 90 days in receivables will quickly give a provider a good idea of how well their medical billing and account receivable processes are being managed by a third party medical billing service.

A common mistake for many providers with an outsourced medical billing model is to gauge the effectiveness of the process in the very short term, i.e. week to week or month to month. Providers maintain a vague and informal sense of their cash flow position by keeping mental tabs on the checks they received this week versus the prior week or if they deposited as much money this month as last month. Unfortunately by the time a weakened cash flow gets the provider’s attention a much larger problem may be looming.

What causes a slow down in cash flow in the outsourced medical billing model? The most commonly cited scenario is lack of follow up on the part of the medical billing service. Why? Like any other business, medical billing companies are concerned first and foremost with their own cash flow.

A medical billing company generates 99.99% of their revenues on the front end of the medical billing process – the data entry process that generates claims. Medical billing companies that devote nearly all of their manpower to data entry will be understaffed on the backend of the medical billing process – the follow up on unpaid claims. Why? Every hour of data entry generates an additional one to two hours of claim follow up. Unfortunately for the provider, a medical billing company that ignores does not devote enough manpower to the diligent follow up of 30, 60, 90 days in receivables can mean the difference between a provider making a profit or suffering a loss during any given time.

Practice Management Experience & Management Style

Providers with practice management experience will be able to effectively manage or recognize and resolve a problem with his/her medical billing process before the cash flow crunch gets out of hand. On the other hand, providers with little to no practice management experience will more likely allow his/her cash flow to reach a critical stage before addressing or even recognizing a problem even exists.

Whether a provider with medical billing issues chooses to retain and fix their current medical billing model or implement an entirely different medical billing model will depend to a great extent on his/her management style – some providers cannot fathom having their medical billing staff out of sight or ear shot while other providers are completely comfortable with turning their medical billing process to a third party medical billing service.

Local Labor Pool

Whether a provider chooses an in house or outsourced medical billing model, a successful medical billing process is still contingent on the people involved in executing the medical billing process. On a side note, choosing office staff for an in house medical billing model is similar to choosing a third party medical billing company. Regardless of the model, a provider will want to interview the potential candidates or an account executive of the third party billing service for experience, motivation, team oriented personalities, highly developed communication skills, responsiveness, reliability, etc.

Providers with an in house medical billing model will have to rely on their human resource and management skills to attract, train and retain qualified candidates from the local labor pool. Providers with practices located in areas lacking qualified candidates or with no desire to get bogged down with human resource or management responsibilities will have no other choice but to choose an outsourced medical billing model.

Medical Billing Related Costs

As a business owner, the provider’s primary responsibility is to maximize revenues. A responsible business owner will scrutinize expenditures, analyze returns on investments and minimize costs. In an in house medical billing model, costs associated with the medical billing process range from the Internet access used to transmit claims to the office space occupied by the medical billing staff.

The most effective way to manage medical billing costs is for the provider to think of the sum of those costs as a percentage of the practice’s revenues. The provider’s accounting software should allow for him/her to classify and track medical billing related costs. Once the medical billing related costs are identified, dividing the sum of the costs by total revenues will convert the medical billing related costs to a percentage of revenues.

The exercise of converting medical billing related expenses to a percentage of revenues accomplishes three things: 1) gets the provider, business manager or accountant in tune with the medical billing related costs of the practice; 2) provides a basis for more in depth analysis of the practice’s cost and revenue components; and 3) allows for easy comparison between the cost impact of the in house versus outsourced medical billing models.

The cost of an outsourced medical billing model is fairly straight forward. Since the fees of the vast majority of medical billing outsourcing services appear to be a percentage of a provider’s revenues, the annualized cost of the medical billing service’s fees will be a fairly close approximation of the provider’s medical billing related costs for this model.

In the event a provider is considering an outsourced medical billing model, he/she should keep in mind that this model is not necessarily the silver bullet to ending all medical billing related costs and headaches that medical billing services tend to advertise. True the medical billing company will acquire some of the costs associated with the medical billing process but the provider will still need staff to act as the intermediary between the provider’s office and billing service, i.e. someone to transmit data to the billing service.

Costs will further increase for the provider if the billing service charges additional fees for add-on services such as on line access to practice data, practice management software, management reports, handling patient inquiries, etc. The actual cost of the service will increase even more if claims 30, 60, 90 in receivable are not properly worked to facilitate adjudication.

Summary

In summary, the provider must carefully weigh the pros and cons of each medical billing model prior to making a decision. If the provider is not comfortable or experienced analyzing financial data he/she must enlist the services of an accountant or other financial professional. A provider must understand the costs as well as the inherent pros and cons of each medical billing model.

Providers employing an in house medical billing model need to understand the true cost of their process. Determining the true cost not only requires accurate financial data and accounting but an objective evaluation of the components of his/her current process, i.e. technology and staff. Why? Outdated technology, under staffing, turnover, or unqualified staff may contribute to the appearance of a low cost of ownership but those shortcomings will ultimately cause a loss of revenues.

In the event a provider is determined to utilize a third party medical billing service, he/she should invest the time to thoroughly familiarize him/herself with the medical billing outsourcing industry prior to interviewing prospective billing services. The provider must understand the hidden costs associated with the outsourced medical billing model in order to make an informed decision.