Don’t Use Denial Rate to Measure a Payer’s Performance

Sep 09, 2021

By Jerilyn Morrissey, MD

Regardless of who your team reports to on the organization chart, there is no getting around the fact that Utilization Management (UM) is part of the clinical revenue cycle of your organization. Embracing that concept may challenge your comfort zone and require a cross-functional approach.

Utilization Management, beyond admission status and denial rates, requires a close look at negotiated rates, what you think you are getting paid, and what you are actually getting paid by payers. Unfortunately, internal Key Performance Indicators like denial rates and overturns are easily gamed to show seemingly good performance while undermining and sabotaging your organization’s financial performance without your awareness. Payer’s performance can only be accurately and reliably understood when evaluated as the cumulative impact of all the functions that affect performance.

Benchmark Medicare Advantage Payers Performance to Traditional Medicare

So how should you do that? In the age of copious data and metrics, how do you know if your metrics tell you what you think they are telling you? How do you know if you have good or misleading metrics? An excellent place to start is with a benchmark metric that allows you to compare performance. Let’s start with the Medicare payers. The benchmark for Medicare Advantage Organizations (MAOs) is traditional Medicare because it is the same patient population, and Medicare is the most frictionless payer in the whole system—your organization submits a bill for services, and it gets paid. Using this benchmark allows us to ask and answer the question, what would our facility have gotten paid if our Medicare Advantage (MA) patient had walked in the door with a traditional Medicare card instead of a MA card? Medicare Advantage plans should pay more than Medicare, right?

Let’s look at a simple example: if the DRG payment rate for our Medicare patient is $100, in the frictionless Medicare system your organization will get paid $100. However, if that same patient with the exact diagnosis walks in with a MA card and your negotiated MA rate with that payer is 103% of Medicare, will you get paid $103? Can you tell from your denial rate metrics if you got paid $103? Can you tell from your overturn metrics if you got paid $103? Obviously not, those metrics measure activities, but on their own, they don’t tell you anything about a payer’s performance. In fact, they can mislead you into thinking the payer that is easiest to work with is the highest performing payer. (Remember anecdotes are not the same as data discussion in a previous Versalus Voice.) By adjusting your metrics to evaluate payer performance, you will quickly identify revenue erosion at every step in the clinical revenue cycle.

Common UM Metrics Do Not Measure Payer Revenue Erosion

Let’s start with the most significant source of revenue erosion, self-denials. Misuse and overuse of observation status to avoid a high denial rate is self-inflicted revenue erosion. Still, as you may suspect, it has the same result as a payer-issued denial. They both result in less revenue. 

What about that peer-to-peer case that resulted in an overturn? Does your 85% peer-to-peer overturn rate tells you anything about how the payer reimbursed you for that patient? Sadly, it’s common for the final reimbursement to match the observation rate you thought you overturned instead of the Inpatient payment you were expecting. Can you see that in your peer-to-peer overturn metric? Did the billing office accept that observation payment? Unfortunately, the story of revenue erosion does not end when the patient walks out the door. The reimbursement continues to shrink as DRG downgrades are applied and prolonged lengths of stay are classified as avoidable while you did everything on your end on time and then awaited approval for placement from the very organization that is calling the days avoidable.

By looking at metrics that uncover revenue erosion, you will quickly find that, when compared to traditional Medicare, instead of getting paid $103 for that patient and DRG, you are really getting closer to $86. Benchmarking will allow you to see the variance in MA relative to Medicare, but knowing what metrics to look at will show you how significant the variance really is. So, take a few minutes today, look at all the metrics your team is using to measure performance and ask yourself one question: Is this metric telling me how well a payer is paying? This is the ‘stepping outside the comfort zone' part I mentioned at the beginning. Measuring a denial rate is comfortable and familiar, but it doesn’t help your hospital achieve maximal compliant revenue, and it doesn’t tell you where you are losing revenue. It merely tells you how good you are at avoiding a denial, no matter what the cost.

Questions/Comments? Contact me at 1.866.299.3301 or send me an email.

This blog was first published on the Versalus Voice for Utilization Management. 

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