The revenue cycle management (RCM) is a key financial management component of any industry.   This term is widely used and very complex in the hospital industry but the concepts apply to small businesses as well as to large ones.  Mr. John (Giancarlo) Meazzo, M.A. President of GMA3000.COM is the guru in this areas when he was a controller and CFO of California hospitals and responsible for the RCM.  The more complex a revenue system is, the more it needs attention from the executive management e.g. Chief Financial Officer (CFO) and the need of highly skilled accounts receivable (AR) managers. Unfortunately, the critical process is often left only to the AR manager and often overlooked and misunderstood by executives.

Managing revenues and ensuring collections is critical for the livelihood of any entity. But that is not all! There are pre-revenue tasks of the RCM that are key to the RCM cycle.  Executives often lack the background to identify problems and take corrective action. But before reacting, they need to insure that the framework of an excellent revenue management system is in place. A revenue system includes a prerequisite.

Understanding your cost structure and knowing the fixed and variable cost components

of each product or service that is sold. Before selling anything, from a nail to an airplane, understanding the direct and indirect costs of producing the goods is essential to fiscal livelihood.

The RCM segments (samples)

1. Pre-production segment
   1. Purchasing products (used to manufacture or resell) at most reasonable prices but highest quality
   2. Ensuring viability of supplier
2. Production segment
   1. Have an excellent cost accounting system
   2. Understand how to capture and report costs
3. Selling segment
   1. Have the best Marketing and Sales manager.  If you cannot afford the best, have a “guru” who provide consulting services.  Have a realizable marketing and sales strategy
   2. Have sale and return policies
   3. Develop from yearly to daily sales goals
4. Billing segment
   1. Have a great charge master (fee / product price schedule).  Consider bundled and unbundled pricing
   2. Ensure policies and procedures are in place, have checks and balances.   Provide management with sales reports with comparison to projections (budgets)
   3. Have a statistical reporting system in place (along with Dollar/Euro) to report data to the Key Performance Indicator (KPI) reporting system.  This will be the basis of your revenue budgeting system!
   4. Develop and disseminate reports for managers, sales force and other stakeholders.
5. Collection segment
   1. Review accounts receivable aging reports (shows balances by client in 30 day increments) at least monthly.  This should be performed by the CFO and the Director/Manager of billing and collection (or with the consultant)
   2. Have good policies and procedures in place
   3. For non or late payments, have a system in place from contacting the client to having an agreement with a collection agency
6. Reporting segment
   1. Ensure to develop “rolling” or “ roll forward” reports.   Analyze the significant changes in activity.  Take corrective action if sales levels fall below quotas.
7. Statistical segment
   1. Understand well all the Units of Service (UOS) and Relative Value Units (RVUs) and reporting the data.   Analysis of trends, significant changes in sales volumes (in total and by client, or segment) is essential.   A system of analyzing changes in activity needs to be in place.  Charts or roll forward reports will assist you in pinpointing problem areas that need corrective actions.

A business cycle manager may not have the expertise and education of optimizing and controlling this important function. They may know the basic concepts but lack the analytical tools to identify problems and improvements. Executives may not know which indicators (ratios) to establish for good revenue cycle management and review.  Days in accounts receivable, a typical gauge of how AR is managed, is one of many key indicator! AR managers are usually too busy in dealing with the “issue of the day” and do not focus on the long-term management of accounts receivable.     Are the executives the “watch dog” of the AR manager? Most likely not.  A consultant a few hours a week or month may be a wise choice.   The consultant will objectively analyze the data and report to the executives.   Let’s not forget that an AR manager may not be willing to share data with his superiors, if it makes him look bad.

All industries have revenue cycles. The process of providing the service, generating revenue and collecting revenue is a basic business function. In the health care industry it is complex, cumbersome and costly. In developing an optimum AR reporting system it is essential to develop an RCM model with various target performance indicators (ratios) to be analyzed, compared and reported.   Actual vs. target indicators reporting is a must in ensuring the effectiveness of a revenue RCM program.

RCM also includes billing for cost based payers. Therefore good accounting systems have to be in place to ensure payments from payers such as Medicare, Schools, grantors, state funders such as DHS and regional centers are maximized. Ensuring an overhead allocation system that accurately charges cost based payers is essential, along with choosing the most advantageous statistics. Understand the difference between a single or double step down overhead allocation method.   Both will give different results and will have an effect on reimbursement.   Companies should have a cost accounting system to determine the cost of goods or services sold. This can assist in determining the most profitable services. Does the hospital administrator or the CFO know what each of the DRGs (Diagnostic Related Groups) costs are and which are most profitable?  Most probably not!   Mr. John (Giancarlo) Meazzo, M.A. President of GMA3000.COM developed a cost accounting system for hospital while he was the Director of Financial Analysis for a hospital chain.  The system was effectively used to calculate routine and ancillary variable costs for each of the DRGs.  Cost data will allow intelligent and educated negotiations when contracting with payers or clients (e.g .hospital contracts). Collections, write offs and adjustments also need to be managed!

A revenue cycle is the process businesses use to describe the financial progression of their accounts receivables from the very beginning, when they first acquire product, if they’re product based, until they get paid, if they get paid in full.

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