Addressing the Pareto principle: Solutions for low-dollar accounts receivable in the health care revenue cycle

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The Pareto principle essentially states that 80% of the outcome is driven by 20% of the input. For example, 80% of your revenue is driven by 20% of your clients, 80% of your complaints are driven by 20% of your patients, 80% of your denials come from 20% of your payers. Business schools love to utilize this principle to help suggest smart business decisions. For example, if 20% of your customers are causing 80% of your complaints, then maybe it makes sense to forgo these clients. Conversely, if 20% of your clients generate 80% of your revenue, then you should focus more on these 20% and expend fewer resources on the other 80% of the clients that produce only 20% of the revenue. Essentially, the idea is to provide enough resources to produce 80% of the outcome while only focusing on 20% of the work.

The Pareto principle in health care revenue cycle

Interestingly enough, we see the Pareto principle play out time and again in provider revenue cycles and their associated claims and accounts receivable (AR). Roughly speaking, we see about 20% of claims generate — you guessed it — about 80% of patient revenues. These are the large-dollar, high-complexity cases that are critical for a provider to efficiently collect, which we’ll call high-dollar AR. The other 80% of claims decrease in overall value on a per-claim basis, creating a lot of work for little individual award, which we’ll call low-dollar AR. If you had a choice to work a $30,000 claim or a $500 claim, you should work the $30,000 claim every time. And the Pareto principle would agree with you — focus on the 20% of claims driving 80% of the revenue and deprioritize the rest. The issue is that all those $500 claims add up to roughly 20% of your organization’s revenue. With hospitals and physician groups looking at margins in the 1% to 5% range, you can’t afford to just ignore these low-dollar claims.

Considerations for smaller practices

Andy Cuppia, MBA
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If you are part of an independent practice focused on a single specialty, you might be thinking your claim sizes are in a relatively tight range and this principle doesn’t apply to your practice. In this instance, it’s best to look beyond the dollar size and look at other attributes that are causing an outsized portion of work-to-reward. Examples of this could be a difficult payer that demands constant attention and action, a troublesome location, patient demographic or partner. In all cases, the underlying solutions presented hold true but may take a slightly different form.

What’s the solution for low-dollar AR?

Organizations can address low-dollar AR in several ways. As mentioned above, organizations can simply ignore them and hope they resolve on their own. Realistically, this isn’t a viable option, nor is it recommended. Instead, they can do the following:

• Hire additional resources to address these claims. Your current team only has so much capacity and should be focused on the high-dollar AR to start. Thus, you’ll need additional people to address the low-dollar AR.
• Utilize analytics and automation. Analytics help you determine how to group similar claims in order to work them more effectively. From this analytical insight, automation can be applied to certain groups of outstanding claims. Some examples of this include claim statusing, replying to soft denials (i.e., additional information) or simply moving the claim into the proper workflow.
• Update workflows to properly route claims to the right groups at the right time. These workflows are determined in part by your analytical assessment from the prior step as well as the capabilities of your current technology stack and expertise of your team.

The problem with the solution

Ironically, the Pareto principle is working against you as it relates to the solution. Since you’ll need staff to address 80% of your accounts, you’ll need about a four-times-larger staff, all else equal (granted, this can be reduced some with analytics and automation). One organization Savista is partnered with estimated that it would need an additional 45 full-time equivalents (FTEs) to address low-dollar AR. Finding additional capable staff is very challenging in the current environment. Furthermore, with additional staff comes the myriad of other issues such as talent acquisition, training, corrective action plans, turnover, benefits and overall administration.

Utilizing analytics and automation to address these issues means you need to make sure you have that capability as part of your organization. It’s easy to proclaim “we will use analytics” and “we don’t need people, we’ll just automate it,” but it’s increasingly difficult to find the right talent to manage and manipulate the data, understand the output and take actionable measures that deliver results.

Finally, while most technology systems have decent workflow options and capabilities, if your organization doesn’t have access to this type of technology and can’t afford a large investment in a newer system, trying to utilize cumbersome and rigid workflows can be time-consuming and frustrating.

So, what’s the solution to the problem with the solution?

We’ve found the best answer is to partner with an organization that specializes in low-dollar AR. The benefits and advantages are many:

Control: You still get to keep your staff working those 20% of accounts driving 80% of the results. You can also set the parameters of what accounts your chosen partner focuses on.

• Stay focused on core competencies: By entrusting low-dollar AR recovery to external vendors, you can redirect internal resources and focus on core competencies such as patient care and clinical operations, or tackle other opportunities in your revenue cycle.
• Expertise and experience: Specialized vendors possess expertise and experience in low-dollar AR recovery, allowing them to employ best practices and innovative strategies for efficient resolution. They often also have the infrastructure and expertise to access a much larger global talent pool.
• Scalability and flexibility: Outsourcing enables health care organizations to scale their AR recovery efforts according to fluctuating demand, ensuring consistent performance and adaptability to changing circumstances.
• Cost efficiency: Outsourcing low-dollar AR recovery can yield cost savings by reducing the need for in-house resources dedicated to this function, such as staff training, technology investment and administrative overhead.
• Overall revenue and cash enhancement: Unrecovered low-dollar accounts often end up as bad debt write-offs, adversely affecting the bottom line and your cash flow. By prioritizing the recovery of these balances, health care organizations can minimize bad debt exposure and accelerate cash collections.

The solution in practice

Savista has deployed our solution across multiple clients with great success, collecting millions in outstanding balances. Most recently, Savista partnered with Asante Health System, located in Eugene, Oregon. Prior to our partnership, Asante was collecting about $1.5 million in low-dollar AR per month. By outsourcing low-dollar AR to a trusted partner, Asante’s low-dollar AR collections increased to almost $6 million per month — demonstrating a successful outcome of a well-structured relationship with a strategic partner. Most importantly, this example highlights the value that can be created when you partner effectively, regardless of Pareto.

Andy Cuppia, MBA, is vice president of strategy for Savista and offers 13 years of health care and revenue cycle management experience. He currently leads Savista’s service line management team to drive innovation within Savista’s service lines and offerings that maximize value for clients. He previously led Savista’s comprehensive outsource go-to-market strategy and commercial operations.