Matt Szaflarski (00:03):

89% of these requests for information denials end up getting resolved without any sort of net revenue leakage or final denials being posted to the account. But they’re not resolved until 60, 90, 120 days later.

Narrator (00:26):

Welcome to Hospitals In Focus from the Federation of American Hospitals. Here’s your host Chip Kahn.

Chip Kahn (00:36):

Six months ago, Matt Szaflarski appeared on Hospitals In Focus to discuss the impact of the Change Healthcare cyber attack that paralyzed as much as 40% of healthcare for a time. He explained the role of an organization like Change and sketched out the delays in denials that affected patients and caregivers in the wake of that attack. Today, Matt will help us understand another challenge facing care, the surge in claim denials from insurers.

(01:07):

Last month, Kodiak Solutions released a new report titled Death By A thousand Requests, highlighting how these claim denials are adding layers of administrative burden and placing financial strain on hospitals. Reports findings are timely and eye-opening, especially as hospitals continue to navigate operational challenges post COVID. Matt, welcome back to the show.

Matt Szaflarski (01:33):

Chip, thank you for having me again. Excited for the conversation.

Chip Kahn (01:37):

Good. Matt, before we get onto your new data, let’s go back over the last six months and I’ll just ask where are we as a system regarding the fallout from the Change Healthcare cyber attack right now?

Matt Szaflarski (01:52):

Well Chip, I’d say we’re solidly in a stabilization and cleanup phase. So for about the first 60 to 90 days post that Change Healthcare cyber attack, many of the providers we’re really focused in on finding a solution to get their claims back up and running. I think when we talked six months ago, the focus was really how do we get claims back up and running to really help with the cash flow of providers across the country?

(02:25):

Many providers are back up and running from a claims flow perspective, but what they’re dealing with now is what I’d call a bit of the aftermath. When we look at our numbers, we see significant growth still in aged receivables, and that’s due to backlogs from an AR follow-up perspective and also from a billing perspective. And interestingly enough, our July benchmarking numbers just came out and there was a sharp increase of over 40% in the final denial write-off metric.

(02:58):

And we’re still doing little digging into the root causes of all these denials, but I think there is some connection points to this being about 180 days post that situation occurring. Right? 180 days for some payers is the timely filing limit. So if you didn’t get your claim out in time, there’s potential that those turned into timely filing denials.

(03:20):

Now, in speaking to providers across the country, many were successful in establishing waivers with their payers to help forgive any potential final timely filing denials, but what we’re hearing is that that process is still very manual in nature. And therefore we may still be seeing some of these final denials trickling through. At any rate, it’s still causing a lot of administrative burden. There’s still cleanup to be done.

Chip Kahn (03:48):

So that leads me to a question before we get into the new data. For our audience, can you explain in terms of this sort of Change crisis, but just generally what Kodiak Solutions does in terms of helping providers and really ultimately the patients, through this claims processing process, this revenue cycle? Just tell us again what a revenue cycle company like yours really does.

Matt Szaflarski (04:18):

So Kodiak Solutions is a technology company focused specifically in the healthcare finance space. So for both finance and revenue cycle departments, helping our providers solve their complex issues. That includes the valuation of their open accounts receivable, the automation of revenue cycle workflows, the identification of opportunities, and what we call net revenue leakage or administrative burden within their net revenue cycles. We focus on leveraging the data from over 2000 hospitals from our flagship tool called Revenue Cycle Analytics to really guide and inform our customers of the opportunities within their organization when we compare them to what’s happening in the market.

Chip Kahn (05:03):

So you’re really uniquely positioned to have really a large database that tells you a lot.

Matt Szaflarski (05:10):

Yeah, we’ve been growing that database for about two decades now. We started in central Indiana with our Revenue Cycle Analytics tool, and now we’ve got that tool live in facilities across 49 of our 50 states, many of the largest health systems in the country. So we’ve got a great feed of almost real time data. And that really empowers us to have the intelligence at our fingertips to really help guide the operations and help our customers through many headwinds that they’re facing.

Chip Kahn (05:42):

And now you’re coming out with thought pieces, which are just so helpful. Let’s drill down and talk about one of those thought pieces. So recently you came out with a piece entitled Death By a Thousand Requests, and you really looked at administrative burden and financial impact based on all this that you do for providers in this massive database you have. What did you find about administrative burden? How costly is it for those who are trying to provide care in hospitals?

Matt Szaflarski (06:15):

Administrative burden is not necessarily a new concept in the revenue cycle space. In fact, many will define, if you look up the definition of revenue cycle, it’s really the combination of all the administrative functions and the back end of the business of healthcare. So technically all the work in the revenue cycle is adding administrative costs and burden to health systems. One thing that was missing though across the market was a standardized way in order to measure that. So we leveraged our database and actually a focus group of many of our benchmarking clients to begin to develop ways to assign costs to the administrative burdens that are causing great challenges for healthcare providers. We focused in on two specific key areas, one being the inflow of denials. So the inflow of denials creates work for health system employees. They need to resolve accounts in order to get paid, and that takes labor hours to do and thus generates administrative burden.

(07:22):

And then secondly, we’re also looking at the administrative burden focused in on collecting of additional patient responsibility. The Death By a Thousand Requests specifically focuses on a type of denial that we’re seeing growing across the market, and those are requests for information denials. So requests for information denials are essentially occurring when a healthcare provider submits a claim for service. And due to a number of different regulations out there, payers are required to respond to any claim within 30 days across much of the country.

(08:00):

So many of those requests are coming back as requests for medical records, meaning I need to see more data before I release payment for this claim. One of the ways we measure this is measuring what percentage of gross revenue is coming back relative to these denials. And in fact, we’ve seen 2024 year to date, about three and a half percent of all gross revenue billed across the country within our benchmarking database is denied for requests for information that’s about 10% higher than it was in 2023. And to put that in dollars perspective, our benchmarking database encompasses about $1.4 trillion dollars in annual gross revenue across the country.

(08:47):

Just for this one denial type, we’ve seen an increase of about 50 billion dollars annually. So that’s 50 billion dollars more acclaims that need to be worked. And using our administrative burden calculations, that’s an increase in administrative burden of about $140 million. It’s $140 million in extra expense or added cost. What’s most triggering for folks, maybe your listeners, is when we utilize a hindsight analysis… So we look back at these RFID [inaudible 00:09:20] and we ask what percentage of these end up getting paid? The number is about 89%. So 89% of this cost didn’t have to occur.

Chip Kahn (09:31):

Wow. And I would assume that many of these claims are based off of services that had some kind of prior authorization. So then the insurer is coming back to a provider when they submitted a claim, the provider thought that you gave me permission to do this procedure or provide this treatment or this diagnostic, and now you’re asking for more questions when I thought I was just going to submit a claim and get it paid. But you’re telling me I’ve got to provide more information and then you’re going to deny me, and then I’ve got to go get an appeal and I’m winning most of the appeals, but you’re making me go through all these hoops. Is that what’s happening?

Matt Szaflarski (10:12):

Yeah. In fact, one of the ways that we slice this data is by looking at the type of services that are receiving the medical record requests. And there’s a large disparity. In fact, the percentage is much higher when you look at inpatient based claims. And inpatient based claims are the ones with your higher dollars associated to those visits. So anecdotally, in speaking to our providers around the themes that they’re seeing, one of those themes is what the payer is requesting is actually an itemized statement for the charges. They’re doing a charge audit on those accounts.

(10:50):

And you may ask, well, why are they doing a charge audit? Well, many agreements between the providers and payers, there are stop-loss provisions, meaning if charges on a particular case exceed a certain threshold, then an additional outlier payment is applied. And so payers are requesting itemized statements to see if there’s charges that they can find on these accounts that, for lack of a better term, they can argue off and reduce the total charges on those claims.

Chip Kahn (11:22):

I think you all came up with a number of the impact here on net revenue. What was that number and how significant is it, do you think?

Matt Szaflarski (11:30):

I think, again, when we’re looking at denial specifically, we’re seeing about $140 million in additional expense placed on the health systems according to this. So when you’re looking at the bottom line, that number will hit right there. And again, as I mentioned, 89% of these requests for information denials end up getting resolved without any sort of net revenue leakage or final denials being posted to the account. But they’re not resolved until 60, 90, 120 days later. So the providers are meant to not receive those funds until a much later date.

Chip Kahn (12:12):

So obviously you have a time value of money problem here where the insurer can hold the cash even though they’re going to lose that denial in a claims appeal process. They had the money all that time and didn’t you come up with a number that was like 1.4% of net revenue lost from this?

Matt Szaflarski (12:32):

So generally, from a final denials perspective, there’s about a 1.4% net revenue leakage of these denials end up turning into lost revenue. But I think that we’re even seeing that number continue to grow. It’s important to note that request for information denials aren’t necessarily the biggest cause of net revenue leakage for organizations, but they create a lot of additional manpower that needs to be spent on these accounts. And because of that, we’re potentially missing net revenue opportunities in other areas of the organization.

Chip Kahn (13:10):

And I think it’s important to point out, to set a context that, and I think I’m talking apples to apples here, MedPAC, the commission that advises Congress on Medicare, tells us that operating to all payer total and operating margins have fallen to the relative low level of 2.7% aggregate. And that’s a pretty low number already. And then you’ve got these other costs growing that you’re describing, that have nothing to do with care that just have to do with trying to collect on a claim.

Matt Szaflarski (13:46):

To put that into perspective, 2.2%, well, in July of 2024 of this year, across that $1.4 trillion of gross revenue, our providers at aggregate experienced a net revenue leakage of 3.5%. So that’s even higher than their overall margin. So this is a huge opportunity for health systems.

Chip Kahn (14:10):

Wow, that’s just incredible.

(14:13):

Let’s touch on another subject that’s parallel to this in terms of making it difficult for hospitals to provide care. I think in another thought piece that has come out, you looked at observation stays in hospitals versus inpatient admissions. This has been a problem because historically starting on the Medicare side, there were always these questions as to whether or not when a patient comes into the hospital, at what point they leave observation in the emergency room and become an inpatient.

(14:49):

And years ago, Medicare solved this problem on the FIFA service side by saying that if a patient had been… And when they’re in observation, they’re basically up on the floor, they’re not sitting in the emergency room most of that time. If they’d been there two midnights then that could be considered an inpatient admission. On the Medicare Advantage side and on the private side, this doesn’t necessarily work for the insurers, and they’re still playing an observation game. And I think your report showed some indications of that. Could you give us a sense for what your report found?

Matt Szaflarski (15:26):

Yeah, certainly. So going into 2024, the CMS rule and the guidance around the two midnight rule being more broadly applied to both Medicare traditional and the managed Medicare space, this was a huge sign of optimism. We were excited about potentially seeing lower denials associated to managed Medicare. One of the prevailing trends of 2023 was the challenges that providers were facing in the managed Medicare space.

(15:58):

From an analysis perspective, we’re tracking a metric called observation rate. Essentially what observation rate is looking at is all observation cases as a proportion of total bedded cases. And what I mean by total bedded cases, it’s the sum of inpatient stays and observation stays. And so what we’re measuring there, is only cases that had a length of stay of two or more midnights. So this would fall under that two midnight rule, right? If patients were there for at least two midnights or more, we should see the vast majority of those patients be in an inpatient state of care.

(16:36):

It’s a bit of good news to start. We have seen the observation rate for managed Medicare drop about 22%. So it is getting closer to the Medicare fee for service observation rate, but there’s still a large gap there. So for example, at the end of June, the observation rate for all of managed Medicare on length of stay two or more days was 14.9%. For fee for service Medicare, that number’s 3.5%. So it’s still four times higher than what we’re seeing on the Medicare fee for service side.

(17:13):

Still a long way to go, but I do want to say that we have seen some initial reduction in that observation stay, which is a positive sign. There’s still a long journey to go. Another key point that I think was an eye opener when we completed our analysis was we also included the commercial bucket. So these are commercial products not associated to Medicare beneficiaries. We’ve seen that observation rate increase by almost the same percentage as managed Medicare has decreased. And so I’ll leave that there, but something for everyone to digest.

Chip Kahn (17:47):

Well, I guess it’s some good news and some bad news. To close out, let me just say, Matt, that all of your analysis has been so helpful to all of us to better understand in a sense what’s going on under the hood in this processing of claims. And in a sense, the back and forth between hospitals, other providers and insurance companies. At the end of the day, though, we need to improve these processes and your firm and your work are right in the middle of that. From your reports, what do you recommend? What are the conclusions that you’ve come to where behavior on the part of those that are actors in this process need to change so we can cut down some of the added cost, friction costs, of having patient services paid for and coverage provided for patients?

Matt Szaflarski (18:44):

Yeah, I think step one is beginning to level the playing field. So at Kodiak, we’re focused on leveraging the data that we have amassed over the last few decades in order to really start to arm our providers with clarity on what’s happening underneath the hood. Until you pop the hood and look underneath and maybe look at your oil temperatures, you’re not really sure what is happening. And many of these trends that we uncover aren’t organization specific. So if it’s happening at one facility, it’s likely happening at others.

(19:16):

So creating strong data communities, being able to partner with pure organizations and get that data to the appropriate advocacy partners in order to drive the change. I mean, this observation rate issue is a big deal. Final denials has long been an area of focus. Not to spoil our next thought leadership piece, but we’re also going to be looking at the proportion of unpaid medical debt that is actually associated to insured patients and how those insured patients may have insurance policies that they just, for lack of a better term, can’t afford. In t.hat all of that risk is falling at the feet of the providers and how we are really focused on ways to help level the playing field and tell the story of the challenges that many of our customers are facing on a daily basis.

Chip Kahn (20:08):

Matt, I just want to thank you for all the work that you and Kodiak Solutions are doing. I know that this has been a relatively technical discussion, but I think you’ve made a very complicated subject matter clear. And frankly, as it is in all of healthcare, the devil’s in the details and the work that you do, and Kodiak Solutions does, is clearly in those details, but you’ve got to understand those to hope to ever improve. So thanks a lot, and maybe six months from now, a year from now, we’ll bring you back to talk about the further work that you’ve done and made public to bring some light on the healthcare process.

Matt Szaflarski (20:50):

Thank you, Chip. It’s always great speaking with you.

Chip Kahn (20:53):

Thanks a lot.

Narrator (20:57):

Thanks for listening to Hospitals In Focus from The Federation of American Hospitals. Learn more at fah.org. Follow the Federation on social media at FAH Hospitals and follow Chip at Chip Kahn. Please rate, review and subscribe to Hospitals In Focus. Join us next time for more in-depth conversations with healthcare leaders,