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May 2009
Heads Up When Revenue’s Down.
Dear Reader,
There are a number of issues that can affect the “health” of healthcare accounts receivable, but like the onset of the flu, these issues often give some warning. In this article, we’ll take a look at the far-reaching impacts of revenue reduction and how to avoid a pandemic.
 In a January 2009 study by Healthcare Financial Management Association, the majority of hospitals responding to the study were experiencing drops in inpatient volumes and operating margins. Such pervasive revenue reduction means receivables-based lenders and healthcare companies can expect a decline in collections and tightening of availability on the line of credit.
The Short and Long of It The short-term impact of revenue reduction equates to shrinking collections and a decrease in cash flow. Many healthcare companies respond to the decrease with cuts in staff. A March survey by the American Hospital Association reported that nearly half the hospitals had cut staff. Often times, the billing and collections department staff is included in this cutback, further decreasing collections and cash flow.
For any company required to file a Medicare or Medicaid cost report, the long-term impact of staff cuts can be a reduction in expenses, usually resulting in a deficit on the cost report. When this happens, it sets off a chain reaction of lower cost-based reimbursement rates and further declining revenue in the subsequent period. In the event the company closes its doors, these governmental payers may suspend payment until the cost report is completed and take any deficit out of outstanding claims.
If revenue reduction goes “untreated,” healthcare companies may lose access to cash as their ability to draw on their receivables lines are eliminated. Lenders may then be faced with over-advancing in order to keep the company in business or forcing a bankruptcy.
Stay Ahead of Reduced Revenue
Lenders and healthcare companies don’t have to be caught off guard by the impacts of revenue reduction. To stay ahead of the problem, lenders will need to understand the impact on future revenue and will want to keep a close eye on their borrowers to make sure cost reports are filed promptly.
Healthcare companies will need to anticipate the impact and turn their attention to collection activities to increase cash flow. They’ll want to focus extra attention on collecting older receivables to make up for the collections that would have come from current revenue. At a time when healthcare companies may not want to add staff, putting an outside agency to work means that monies paid out will be covered by increased collections coming in.
Bottom line: a reduction in revenue doesn’t have to turn into a pandemic. By understanding the issue and increasing collections, companies can turn things around and regain the health of their receivables.
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