What Your Denial Rate Is Not Telling You

Aug 11, 2021

By Jerilyn Morrissey, MD

Let’s talk about denials, a frequent and often unpleasant topic in Utilization Management (UM). One of the core beliefs of most UM teams is that denials are bad, and most of UM teams’ efforts are spent trying to prevent or reduce denials. You may have even purchased an artificial intelligence solution or criteria or given a payer access to your EMR to create a “frictionless” system to decrease denials. But let’s take a step back from the day-to-day operations in UM and focus on the strategic goal of UM. Is the purpose of UM to decrease denials? Or is the goal of UM to ensure the judicious use of the hospital or health system resources by evaluating the appropriateness and medical necessity of health care services and providing high-quality care while reducing risk and preventing loss? Obviously, I think it's the latter. So, let’s look at all the ways focusing on the denial takes us away from the goal of preventing loss of compliant revenue.

The simplest way to reduce denials

Unfortunately, the simplest and most common way for the UM team to decrease denials is to accept observation status. This can happen at every step in the UM review process. Using commercial screening criteria instead of the 2-Midnight Rule and performing the review while the patient is still in the emergency department is the quickest path to observation status. Commercial screening criteria require a patient to meet an intensity of service and severity of illness that gets more restrictive with each passing year. Once a patient is started down the Observation pathway, the only way to get to Inpatient status through commercial screening criteria is to get sicker and require more services. Commercial screening criteria do not consider that some patients don’t get better overnight and might take 2-3 days to get better. These patients require multiple midnights of hospital services. A patient who requires necessary hospital care across multiple midnights is appropriately an Inpatient, but commercial screening criteria keep the status perpetually Observation. We take this type of denial for granted every single day, and no one ever counts it in a denial metric report.

Another common path to avoid denials is to “learn” from payer behavior and adopt the payer behavior as our own. Have you ever reviewed a case and thought to yourself, "I know that this payer never approves this diagnosis as Inpatient, so let’s make it Observation." Or how about this thought, "I know this payer won’t agree with Inpatient until the patient has been here for 48 hours, so let’s change it to Observation." By internally rationalizing and adopting the payers’ behavior, we avoid the payer denial even though we are ultimately issuing a “self-denial.” And since we don’t measure it in our denials metric, it doesn’t really count as a denial, right? Wrong!

What about this scenario? Every clinical bone in your body tells you a patient is appropriate for Inpatient status, so you submit the clinical information to the payer for approval. The payer applies an arbitrary and inconsistent rule set and responds that they will only approve Observation status. You have two choices at this point: 1) accept Observation status as it’s not technically a denial and won’t get measured on any denial reports: or 2) send the case to your physician advisor. Your physician advisors also know that denial rates are measured and, in an effort to bring value and not waste time, they decide to go to peer to peer or appeal on only those cases they feel totally confident they can win. Does your physician advisor team boast of an overturn rate of more than 80% on peer to peers? If so, look at the numerator and the denominator in that equation. If they are only pursuing the cases they are totally confident they can win, the denominator is likely small compared to all the cases you sent them for review. All the cases they choose not to pursue were again essentially denials that never got picked up in your denial report.

Is reducing denials the right goal? 

The opportunities to decrease revenue in the name of decreasing the denial rate don’t stop after the patient is discharged. They continue into the business office with processes that change claims to Observation status to avoid denials and/or decrease days in accounts receivable. And if you are not following the progress of a case from start to final billing, you might miss the fact that even though the payer agreed to Inpatient in the UM process. the final payment was for Observation and no one in the business office noticed because the lower than agreed upon payment was never classified as a denial.

So, remind me again, why are denials bad? Well, if the actual problem is that a denial represents a loss of compliant revenue, why does almost every process we have in place to decrease the number of denials result in the same, if not more, loss of revenue? It’s because, over many years we focused on a singular and intuitive key performance indicator (KPI), denial rate, and lost sight of the goal. If our denial rate is going down and our revenue is not increasing, something is wrong with the process to lower the denial rate. The solution is simple. All the departments in the clinical revenue cycle (UM team, PA team, business office, etc.) must agree on the same goal, prevent loss of compliant revenue and stop measuring traditional metrics (i.e., denial rates) that don’t tell the whole story and have been misused and abused over time. Once you have a goal that genuinely reflects this objective, start building your new process and hold accountabilities. Next month we’ll talk about how to create a true and meaningful KPI called Net Inpatient RealizationTM.

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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