finance + rcm: revenue basics

Historically, financial management is not my strength. I love to have my foot on the gas, growing the organization to fulfill our vision. The universe will continue serving you the same riddle until you solve it. In my case, I’ve had extra helpings of “get your shit together or you’ll lose it all.” So now, the universe has my attention. I’m sure managerial finance is difficult in any business, but it’s especially challenging when you’re an in-network healthcare provider with a complex mix of services (especially if you’re paying top of market and expect lower provider utilization than other companies).

No money; no mission. Let’s dig in.

The above graph shows a frictionless growth scenario. Spoiler alert: there’s always friction. You can’t pay your bills on accrued revenue (unfortunately).

Key Terms

Capacity Revenue: This represents the maximum potential revenue based on the full utilization of services. If you’re growing your team (or the average collections/visit), this will continue to go up and to the right.

• Levers: Increase/decrease the number of providers, change billing expectations, negotiate higher reimbursement contracts, add higher-margin services

Accrued Revenue: This shows the revenue recognized but not necessarily collected, indicating the earnings based on services provided. I generally assume it takes 2-3 months for a new provider to become “productive” from a financial perspective. We aim for break-even for medical providers after the first month, modest profitability in the second month, and full utilization (and maximum profitability) by the third month.

• Levers: increase provider availability and patient acquisition efforts (1) marketing, (2) business development, (3) streamlining the intake process

Collected Revenue: This is the actual cash received, which is crucial for understanding cash flow. Whew, this one is a doozy (especially throughout the Change Healthcare cyber attack, which we’re still navigating). Ultimately, cash is king, and you’ve got to ensure that you have enough cash coming in to cover your short-term liabilities.

• Levers: Improve billing accuracy by tracking and addressing common errors, retrain the admissions team to collect the necessary information, enforce financial obligations before scheduling follow-up visits, and increase your RCM team.

 Break-Even Point: This line shows the revenue needed to cover all fixed and variable costs, which is essential for understanding financial stability. You can’t consistently collect less money than you’ve got going out.

• Levers: spend less, collect more :)

If the delta between…

Capacity revenue and accrued revenue are increasing consistently, and you’ve got a patient acquisition or scheduling problem. You can serve more patients, but you’re not getting them scheduled quickly enough.

• Levers

  • Increase resource allocation [resource allocation = people, process, technology] to (1) marketing/business development and (2) admissions/intake

  • Cut excess capacity (layoffs)

Accrued revenue and collected revenue is increasing consistently, you’ve got an issue with your revenue cycle management (RCM). You’re seeing enough patients, but you’re not able to turn patient care into $$$ collected.

• Levers

  • Increase resource allocation to RCM through (1) better intake paperwork [cut down on rebills and delays], (2) adding billing capacity, (3) bringing on a third-party billing company.

  • Change your compensation structure so that you pay providers when you are paid (gasp…yeah, not a good idea).

  • Secure debt financing based on the strength of your receivables (which requires a great track record, trust me).

When break-even point is higher than cash collected. Growth is more frequently stymied based on digestion, not ingestion. Just because you have unprecedented demand for services, doesn’t mean you can’t go tits up (as I well know).

• Levers

  • Increase resource allocation to RCM / ensure you can ramp-up collections proportionally with completed services.

In Sum

Understanding and mastering managerial finance is critical. It's not enough to simply recognize revenue; we must ensure that our financial processes—from patient intake to final payment—are seamless and efficient. By focusing on both "ingestion" and "digestion" of revenue, we can mitigate the risk of cash flow issues, optimize our operations, and sustain our mission of providing exceptional care. 

Alright, my sleep has been a mess. That’s enough for tonight.