June 20, 2013

Compliance and ‘Key Performance Indicators’

By

Laventhol and Horwath (L&H) was the seventh-largest public accounting firm in the United States when it failed in November 1990. Many of us old-timers in healthcare fondly remember L&H for creating one of the first computerized Medicare cost reports. I am old enough to remember doing cost reports with a pencil and calculator. 

L&H did not go bankrupt because it was doing something other firms were not doing. L&H went bankrupt because it could not afford the settlements from the lawsuits that are filed against accounting firms every day. Frankly, they ran out of money.

The strain on any company’s compliance structure intensifies greatly when the company is not on sound financial footing. At an earlier stage, though, before bankruptcies and other larger problems emerge for a business, there still can be signs of stress. These signs often come in the form of financial indicators, and compliance officers need to know how to identify them and how they affect compliance. 

I would add that financially challenged companies that enact cost containment measures can leave a trail of angry vendors and terminated employees. If you want to turn someone into a whistleblower, there is no better way than firing him or her, or by cutting their contract.

Making compliance tougher is the fact that there are a lot of people looking at your financial data. Some of this data is available to the public and other data is available to regulators, but all of the scrutiny increases the chance of triggering a RAC audit or whistleblower action against your facility.

What are the indicators?

I group indicators that compliance officers need to know about into three general classifications:

  • Financial indicators
  • Dashboard indicators
  • Revenue cycle indicators

What these indicators are and who has the ability to recognize them are factors that impact your exposure risk. Again, there is data available to:

  • The general public
  • RACs and whistleblowers
  • Regulators  

What does the general public know about my business?

If you submit healthcare billings to any payor, you need a National Provider Identifier, or “NPI.” Your NPI is a unique number assigned by the federal government, and the public database includes:

  • Your practice address
  • Your billing address
  • Your telephone and fax numbers
  • Your provider type and specialty
  • Your other assigned billing numbers, including your Medicaid provider number

If you are an institutional provider, which include hospitals, nursing homes, home health administrations, hospices, end-stage renal dialysis facilities, Federally Qualified Health Centers and Rural Health Clinics, you must file a Medicare cost report.  

Complete cost report information is reported to the Centers for Medicare & Medicaid Services (CMS) Healthcare Cost Report Information System (HCRIS) by Medicare Administrative Contractors (MACs) and published on the CMS website. Reports are available on the Internet going back from the most recent reports to reports filed in the last 15 years. Cost report data includes, but is not limited to:

  • Census data
  • Income statements
  • Balance sheets
  • Changes in equity
  • Salary data
  • Benefits data
  • Paid hours for employees
  • Medicare settlement amounts
  • Medicare case mix data
  • Payor mix data

If you are incorporated as a nonprofit organization, your federal tax return is public information and is also available on the Internet. Your return includes:

  • Income and expense data
  • Balance sheet information
  • Compensation for your highest-paid executives
  • The amount of charity care you provide

 

What do the regulators, including RACs and whistleblowers, know?

Now, the RACs have more tools at their disposal. RACs and the larger consulting firms can get actual paid claims data for your facility (minus HIPAA information) through the Research Data Assistance Center, or “ResDAC.” ResDAC is a CMS contractor that (in theory) provides free assistance to academic, government and nonprofit researchers interested in using Medicare and/or Medicaid data for their research. The data available for data mining includes:

  • Inpatient hospital claims
  • Physician claims
  • Durable medical equipment claims
  • Outpatient hospital claims
  • Skilled nursing claims
  • Enrollment data

Fiercer than RACs are Zone Program Integrity Contractors (ZPICs), which can mine current paid claims data for your facility at will, looking for trends and unusual payments. 

What does this mean for compliance?

Regulators use the term “fraud triangle” in assessing risk for compliance. The fraud triangle consists of three components:

  • Pressure
  • Opportunity
  • Rationalization

Your financial indicators show if your company is under pressure to commit fraud. Let’s look at some of the financial indicators available to the public that could show your company is at risk for fraud, based on pressure:

  • You have a poor or negative operating margin (operating net income/operating revenue)
  • Your “days cash on hand” is low (cash/(operating expense/depreciation/365).
  • Your “days in accounts receivable” is high (net AR/net revenue/365).
  • Your ratio of your current assets to current liabilities is low (current assets/current liabilities).

In addition to financial indicators, you also have “dashboard” indicators. A financial dashboard in healthcare includes items like:

  • Frequency of billed claims details, including:
    • Diagnosis codes
    • Procedure codes
    • Length of stay
  • Payments and denials by:
    • Financial class
    • Type
    • Revenue code

In addition to creating pressure to commit fraud, these dashboard indicators help providers anticipate what RACs and ZPICs know, including scenarios such as:

  • You have suspicious trends in billed claims.
  • You have certain types of claims that are common targets for auditors:
  • Your Medicare “case mix” is very high.

As a compliance officer, you also will want to be informed not only of the financial indicators and dashboard indicators noted above, but of certain revenue cycle indicators that mean you could have a fraud problem. These indicators include:

  • The ratio of initially denied claims to total billed claims with zero payment is too high.
  • The ratio of initially denied claims to total billed claims with partial payment is too high.
  • The ratio of denials to net revenue is too high.

Conclusion

Moving forward, compliance must be integrated with financial and revenue cycle functions to help you reduce your exposure to threatening regulatory actions. If identifying and recognizing financial and revenue cycle indicators is not part of your compliance efforts, you should add them – and take them seriously as part of your overall compliance plan.

About the Author

Timothy Powell, CPA, is a member of the Moore, Stephens long-term care group. He has more than 30 years of reimbursement experience working with the “Big 4.” He has worked in the managed care area for most of his career.

Contact the Author

tpowell@mslcpa.com

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Timothy Powell, CPA

Timothy Powell is a nationally recognized expert on regulatory matters including the False Claims Act, Zone Program Integrity Contractor (ZPIC) audits, and U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) compliance. He is a member of the RACmonitor editorial board.

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