It’s a simple enough concept, “We provide the services you need, and you pay us for them.” However simplistic in theory that may be, the actual process of collecting what you should is much more complex.

We seek to educate you on 6 major aspects of the Revenue Cycle that prove to raise issues for many Lab Executives:

  1. What exactly the Revenue Cycle is, and how it applies to your lab
  2. What are the main issues in the Revenue Cycle and how to fix them
  3. What “Out Of Network” means for your lab
  4. The benefits of contracting for your lab
  5. How contracting with BCBS affects your revenue cycle
  6. How will outsourcing impact your revenue cycle

Often times labs struggle to keep up with the complex and confusing world of laboratory billing, and that’s okay. Labs seldom specialize in the actual billing practice since their main expertise is performing diagnostic tests.

We understand your Toxicology Lab technicians aren’t necessarily drilled on the specific payer requirements necessary to process Liquid Chromatography tests in claims.

And they shouldn’t be.

To maximize your profit, you need to have an optimized Revenue Cycle with proper management of its processes.

Let’s dive into Laboratory Billing and how the Revenue Cycle affects it.

Laboratory Billing and The Revenue Cycle

The Definition of Laboratory Billing

Laboratory billing is the process of billing laboratory specific claims to the responsible parties for review and payment.

This is what actually gets you paid for the services you, typically, have already performed.

When you receive orders to perform certain tests on samples delivered. After you perform them, you then bill the insurance companies insuring the respective patient in order to receive the compensation for your services.

This process begins with the diagnosis and procedure codes assigned to certain tests and services. Insurance companies rely on these codes to determine coverage and necessity of the services. These CPT codes once billed enter the collections and revenue cycle management areas.

What Is The Revenue Cycle?

TechTarget defines Revenue Cycle Management as “the financial process, utilizing medical billing software, that healthcare facilities use to track patient care episodes from registration and appointment scheduling to the final payment of a balance.”

Simply put, the Revenue Cycle itself is the collective functions involved in tracking, management, and ultimate collection for all products and services you’ve provided.

  1. Coding - Where codes are properly applied to tests, products, and services.
  2. Charge Capture - This is where lab services are put into billable charges.
  3. Insurance Eligibility - Where coverage is verified and coordination is established between the payer and the lab.
  4. Claim Submission - Where debits to patient accounts fall to the patients, and then need to be collected from them.
  5. Reporting and Analysis - Where the claim is analyzed and reported on by the insurer.
  6. Patient billing - Where the remaining balance is transferred to the patient and follow up takes place for collection.
  7. Follow-Up & Denials Management - Follow up is made on remaining outstanding balances and denials from payers.
  8. Payments Posting - Payments are posted to accounts. 


Navigating each of these stages determines the overall revenue your lab is able to collect, and the pitfalls are everywhere. Are you billing all of your work? How efficiently are you sending claims out of the door. Are your CPT codes and HCPCS codes up to CMS guidelines? Is your billing and collections team trained in the specifics of the seemingly endless number of payers

Ultimately, you should ask yourself, “Are my current billing processes up to the task?”

Revenue Cycle Issues

“My lab isn’t collecting as much money as it should” is probably the end all beat all problem experienced by the Lab executive. Your system is designed and operated efficiently, and your revenue cycle should function as seamlessly as your lab. As any collector will tell you, this is rarely the case.

The revenue cycle will have its technicalities and nuances that prevent the proper collection and full payment of the claims it sends out, and while nothing is necessarily perfect, the laboratory doesn’t have to limp through an unoptimized billing cycle. Below, we will get into many of the major problems with the Laboratory revenue cycle, and how to remedy them.

Common Issues In Laboratory Revenue Cycles

Now, when we say issues, we want to clarify they typically originate from external sources. This isn’t the blame game, but it’s critical to identify the problems to work towards the solution.

Let’s look at these revenue cycle issues that cost the lab from collecting all the money it should.

  • Overall, laboratory claims are treated like medical claims. A pivotal mindset must be kept when approaching Laboratory Billing - It is NOT like medical practice billing, and a key mistake that costs labs hundreds to thousands to millions of dollars is assuming the two are twins. 
  • Doctors provide bad order information. One care aspect that hinders the billing process is labs being forced to clarify bad order information. Physicians often poorly detail the needed tasks and labs that are necessary for the patient. Whether the orders are inaccurate, incomplete, or illegible, the lab has to then interpret the ordered procedures and tests.
  • Too much work goes unbilled. When examining lab expenses one thing sticks out: Much of its actual work goes unbilled. Due to the complexities in processing what tasks can or should be billed for, many labs will simply leave the expenses unbilled. This means that due to a lack of resources you’re forced to throw money away, which should be avoided at all costs.
  • Billing teams don’t specialize in out-of-state policies. The common thought arises that, “Most labs do work in multiple states across the U.S.”, and while it’s certainly right, most labs don’t specialize in knowing the different state regulations regarding billing and the state-specific payers associated with that location. Most labs exhaust valuable resources stumbling through the varying billing approaches for each state they operate in.
  • Billing teams don’t focus on the numerous payers and policies. In line with the previous point, labs rarely have the ability to specialize in the seemingly endless amount of payers they encounter. Ask any collections rep and they will emphatically tell you: no two payers are the same. What works for Cigna will not work for Aetna. What works for everyone else might not fly with BCBS. Just because United Healthcare insures AARP that doesn’t mean you can assume they process in the same way.
  • Out Of Network claims are left unresolved due to difficulties. Out-of-network claims come with out-of-network problems, and labs often spend too much time trying to resolve these claims since they are used to treating them like medical billing claims.
  • Labs bear the burden of inaction. Labs often feel “forced” to proceed with testing, even if payments are uncertain for various reasons, and it’s completely understandable. It’s counterproductive to delay these services, but the issue remains that the burden falls to the lab when inaction occurs. The specifics with coverage should already be taken care of prior to the testing.
  • The billing teams rarely specialize in patient balance solutions. Many patients have few if any out of network lab benefits or huge deductibles. In addition to the balance billing laws that are state specific, labs need services skilled in patient outreach and collection.
  • Checks are issued to patients to pay services. Far too often, companies like Blue Cross Blue Shield will issue checks to the patients instead of the laboratories themselves. In this case, it is difficult for the labs to then reach out to the patient for collection.
  • Labs lack expert reps. With all these situations, labs lack expertly trained representatives tasked with coordinating payment with the responsible individuals.
  • Labs lack effective billing resources. Simply put, labs lack thorough billing resources. With this in mind, the numerous information requests that arise throughout the billing process cause delays as the labs divert time and resources to providing things like medical records, documentation, and medical necessity.

The Solutions

Simplicity in the solution is key.

  • Overall, laboratory claims are treated like medical claims, so specialize your billing team in laboratory billing specifics. One of the easiest ways to resolve this issue is educating your billing team on their specialties. While this may sound like a daunting task companies specialize their collectors training all the time.
  • Doctors provide bad order information, so implement a team/system to clarify the orders when received. While the perfect world operates with clear (legible) physician handwriting and order input, the revenue cycle often isn’t afforded that luxury. Solve this by having a team specialized in physician outreach that has a shorter, more direct line of communication to the doctors directly.
  • Too much work goes unbilled, so optimize your billing to know what is unbilled and adjust the cost for market and reimbursement needs. While the problem exists that work done and products needed for testing are often unbilled, the solution lies in optimizing your billing procedures. Markets fluctuate and the money must be collected. Optimize it with assessing what goes unbilled and adjust the cost to meet the market needs.
  • Billing teams don’t specialize in out-of-state policies, so train your staff to know how to navigate out-of-state payer policies. Out of state policies means claims have to cross over from home plans to local plans. If coordinating payments with one payer was difficult enough just imagine two payers (who don’t want to pay) coordinating together. This is solved when you have a billing team that is trained in out of state policies and procedures (which also plays into the next point).
  • Billing teams don’t focus on the numerous payers and policies, so train your teams on the various payers. As mentioned in the previous point, resolving out of state claims and claims with various payers is streamlined when your billing team is well educated and trained on processing specifications with their respective payers. Many payers will coordinate with billing teams on their personal preferences (how to submit claims, timely filing deadlines, etc…). Research your payers and construct training tailored to their guidelines to better process your claims.
  • Out Of Network (OON) claims are left unresolved due to difficulties, so adjust your charges to ensure that what pays will pay enough. Just like with before, the specifics of OON claims are difficult in the same way that OOS and payer specific claims are as well.
  • Labs bear the burden of inaction, so educate your staff on what will pay, what won’t pay, and how to receive reimbursement for your work. When inaction is the only result of the current processes, revision is imperative. Clearly identify the areas where no actions are being taken to resolve revenue blocks and implement change. Structure it to operate around it. Certain payers that won’t pay on certain codes when they should? Devise a payer balance solution plan that will address the issue with the insurer directly. Timely filing an issue when handling claims with multiple payers? Implement a strategy to have the claim submitted to the relevant parties without skipping steps.
  • The billing teams rarely specialize in patient balance solutions. When the payment falls to the patient, one of the most difficult things is simply contacting them for payment. Successful billing solution services often establish a patient outreach team that only deals with facilitating collections once they’ve hit patient responsibility.
  • Checks are issued to patients to pay services. While this is often times unavoidable, having a strategy to follow up with patients when the checks are written to them directly is crucial. The insurance paid, so all that is needed is for the follow up team to coordinate the payment with the money they’ve been given for the testing to the lab.
  • Labs lack expert reps and resources. The two options for solving the issue of needing trained, skilled representatives to collect payment are either specializing in billing and collections or outsourcing. Specializing is costly in regards to both hiring and training, but it pays off through keeping all aspects of the revenue cycle internal. While outsourcing does cost more money, it’s beneficial in the way that they do all the work for you with all the training necessary to minimize these errors.

In Summary

The perfect revenue cycle doesn’t exist. Insurance companies will never want to pay you, and the sooner you go out of business the better for them. As a Lab Executive, you fight this with investment. Invest in identifying where your problems are, and training your billing team to solve the various issues with OON, OOS, unbilled work, and all the other various issues with the Revenue Cycle. Another viable solution to optimizing your Revenue Cycle lies in outsourcing. Maybe it’s time to just hand it off to the experts if you lack the resources (or if your resources aren’t as capable).

Hopefully, this has educated you to better address the issues you have in your Revenue Cycle, and start devising a plan to bring in more money.

Out Of Network: How It Affects The Revenue Cycle

In recent years, insurers have been forcing labs out of network (OoN), and, as a result, they are unable to contract due to changes in healthcare coverage.

Only the largest labs that can execute an array of services get contracts and remain in network.

So what does being out of network really mean? What are the pros and cons of being in or out of network?

A lab that is out of network means that they have not contracted with an insurer to receive reimbursements at a negotiated rate.

For laboratories, being out of network is truly a nightmare. Medical insurers are making it more and more difficult for laboratories that are out of network to receive the reimbursements they are owed.

These roadblocks that make being OoN a nightmare for labs include:

  • Pre-authorization for molecular and genetic testing: large medical insurers are requiring prior authorization for specific testing before payments will go through. This means that labs have to wait for this to come through before running the tests. Ordering physicians apply pressure to have tests run quickly but the entire process is slowed without the approval.
  • Intensive audit processes by commercial and government payers: large insurers are now looking back at labs prior paid services to check for proof of medical necessity. This auditing means that any mistake made in the billing cycle could pose legal danger on your labs. Not to mention they slow your revenue cycle down as well.
  • Billing compliance and laws: labs must make sure they are keeping up with the legal changes in medical billing, specifically for OoN labs. PAMA updates, contracting rates, and legal pressure across the nation alter OoN collection negatively as there is no way around these “set-in-stone” guidelines.
  • Reimbursements paid directly to patients: insurers are putting the responsibility of payment in the hands of the patient instead of making direct payments to the lab. Even if patients are honest (though some are not, of course), it is an uphill battle to receive payment. Patients get a check and very often neglect to set aside the amount they need to pay out.  They are unlikely to be diligent about disbursing reimbursements to labs and other providers, especially if the bill from the lab shows up long after the money is spent.
  • Late follow-up: labs are forced to wait to hear back from payers on payment or denial. They might follow up after 60-90 days if they don’t hear anything if they follow up at all. Labs will then submit a statement to the patient requesting reimbursement by the payer. By the time you hear whether the claim is adjudicated and payment is made, it could be a period of months after a check is mailed to the patient.

These barriers not only slow down the revenue cycle, but in many instances it halts the payment process completely. It is getting increasingly difficult for OoN labs to establish an effective revenue cycle.

OoN Benefits

One benefit that an OoN lab has is that it chooses the rate at which it charges for laboratory services. This gives the labs an opportunity to increase and maintain higher profit margins. Higher profit margins means more flexibility and room for growth and most importantly keeps the revenue cycle functioning properly.

Contracted or in network labs must stick to the previously negotiated rate agreed on by both the lab administrators and the health insurer.

Also, OoN collections on patient accounts is usually higher than those of in network collections when insurers issue the checks to the patients (but more on this later when we cover BCBS).

If your lab is out of network, take a look at how these factors affect your revenue cycle. If these obstructions aren’t prohibiting the desired financial progress, maybe it isn’t the right time to get contracted yet.

The bottom line is that this laboratory billing process is essentially designed to collapse, so labs typically collect next to nothing when billing out of network. In fact, many labs just refer these samples out to a reference lab that is contracted to eliminate the cost, avoid the loss, and allow someone to collect on them.  

Not only does this result in a loss of revenue, but it adds tremendous operational complexity in managing referrals and coordinating the delivery of results.

Next, we will dive into the contracting aspect to learn about the benefits of being a contracted lab.

What Benefits Does Contracting Have For My Laboratory?

Choosing to contract or to be in network with a health insurer is a scary decision. What does it mean for your lab?

A contracted lab is connected to a network of labs, physicians, and clinics that are covered by the health insurer they are all contracted with.

This contract dictates that services are paid at a certain rate, so the amount billed for these services must remain fairly consistent as well.

There are major barriers in the revenue cycle that can be avoided by being a contracted or in network lab.

These benefits include:

  • Quicker reimbursements: receiving direct and fast payments from providers without the hassle of hunting down patients who have been given the responsibility to pay the lab themselves.
  • Quicker results: being out of network can require prior authorization by the patients physician before testing can even begin, while in network labs can avoid this step completely.
  • More efficiency overall: colossal payers like BCBS and HMO require complex audits on out of network labs. So, being in network speeds up both payment and testing processes alike.
  • Better connected: contracted labs are exposed to new connections through the network they are contracted with. These connections can provide new business and growth.

Being contracted, though, does have a downfall. These large payers are able to bring the rate of lab work down so low for it’s contracted providers that contracted labs’ profit margins are almost nonexistent. Out of network labs have the freedom to inflate the costs of lab work to generate large profit margins.

To evaluate whether or not you should contract your lab you must assess what problems your lab possesses currently. If you need to maximize profit margins, keep your lab out of network.

If your lab is having problems retrieving reimbursements and communicating with payers, it may be time to get contracted. Evaluate the needs of your lab to determine the best solution: in network or out of network.

Why You Should (or Shouldn’t) Contract with BCBS

Let’s get into a real world example of contracting vs. OoN and how it can affect your revenue cycle, and what better way than examining Blue Cross Blue Shield.

If you work in an independent laboratory, BCBS has probably made your billing much more difficult year after year.

A combination of changing BCBS policies, the morphing landscape of healthcare, competitive market pressures, and acquisition binges by LabCorp and Quest (the two largest US labs) have posed a new question for independent laboratories: Should I contract with BCBS?

Like most issues that we’ve covered previously, the ultimate answer is typically circumstantial.

The pros and cons of being on contract outlined above are substantially more complicated than they used to be.

Contracted payments have shrunk to the point that profit margins are functionally non-existent, and contrasting out-of-network payments have become increasingly harder to collect.

It seems to be a damned-if-you-do and damned-if-you-don’t scenario.

Why BCBS specifically? Because they are the biggest, most involved insurer in the United States.

So what should you do? Let’s break down the origin of the problem, some strategies to mitigate the challenges, and how to evaluate your choice.

The Consolidation Effect

In times past, contracting simply made everything simple and easy. Payments were consistent and nothing hitched your revenue cycle. However, lately, downward pressure applied on contracted rates has altered the collection in this area. This phenomenon is exacerbated by (and has probably driven) industry consolidation.

Now, Quest and LabCorp have dominated business with BCBS as the labs have moved to consolidating smaller labs and moved into acquisition of hospital labs in order to drive costs down.

So BCBS pushed the bulk of their business to the two dominant labs, who gave reduced rates for volume commitments, and for the most part closed their panels and refused to contract with most independent labs.

The “Out of Network” Nightmare

We covered this previously in the Out Of Network section, but let’s examine it as it could apply to BCBS and the revenue cycle.

As the option of contracting and becoming in network disappeared, most laboratories were left with no choice but to be out of network (“OoN”). But BCBS also moved to make that more complicated by adopting a policy of sending OoN payments directly to the patient and making it their responsibility to reimburse providers.  So labs were in a position of having to chase the patient for payment.

Worse yet, BCBS do not implement any system to inform providers when/if payments are made to the patient, so labs had no way of knowing when (or if) it was appropriate to bill the patient, how much was allowed, how much was paid to the patient, whether to follow up on payment of an existing bill, or even whether the claim had been denied entirely.  Under the typical revenue cycle management process, most billing departments or laboratory billing services don’t function in a way that is compatible with this system.

They typically wait to hear back from payers on payment or denial.  They might follow up after 60-90 days if they don’t hear anything if they follow up at all.   Typically they will then submit a statement to the patient requesting reimbursement by the payer.  By the time you hear whether the claim is adjudicated and payment is made, it could be a period of months after a check is mailed to the patient.

Even if patients are honest (though some are not, of course), it is an uphill battle to receive payment. Patients get a check and very often neglect to set aside the amount they need to pay out.  They are unlikely to be diligent about disbursing reimbursements to labs and other providers, especially if the bill from the lab shows up long after the money is spent.

The bottom line is that this laboratory billing process is essentially designed to collapse, so labs typically collect next to nothing when billing out of network with Blue Cross/Blue Shield. In fact, many labs just refer these samples out to a reference lab that is contracted to eliminate the cost, avoid the loss, and allow someone to collect on them.  Not only does this result in a loss of revenue, but it adds tremendous operational complexity in managing referrals and coordinating the delivery of results.

BCBS Opening Up

While for many years there was little choice in whether to contract or remain out of network, recently many of the BCBS groups have been reversing course and allowing independent laboratories to contract and bill in network.  While this could be seen as a good sign for labs, the rates being offered are so low as to be insulting and often unlikely to even cover the marginal cost of running the test.

A Rational Decision Process

So contract fees are too low to be profitable, and OoN fees are nearly impossible to collect.

Here’s an example of an unnamed test BCBS would reimburse for during 2017.



Contracted Rate Reimbursement

Expected OoN Reimbursement

BCBS Sample Test

BCBS Sample Test

BCBS Sample Test


What do you do?

Since the standard laboratory billing process yield little to nothing for out of network payments to patients, you’d be forgiven for casting this as a simple choice between the lesser of two evils and potentially choosing to contract. After all, if you can receive the cost of running the test, isn’t that better than receiving little to nothing out of network?

Don’t fret too much. There is a way to make the choice a bit less evil. First, out-of-network collections can be improved dramatically through processes you can implement to substantially increase your collections on OoN payments.

This involves proactive outreach to the patient regarding payment at three critical points:

  • Written notification of a pending check prior to receipt of the check, as well as the legal implications for keeping the check
  • Outbound call to patient anticipating imminent arrival of the check
  • Outbound call to patient shortly after check arrives

The payment is best if it’s in the form of an endorsed check, but receiving it over the phone from a credit card, ACH, or other means will ensure your lab’s compensation.

And remember, action is everything. Waiting for a patient to take action rarely yields success.

On the other hand, if contracts are so low that no profit is obtained in contracting, remaining OoN and optimizing your patient outreach efforts could yield a much higher payment on your claims.  

The example below shows how OoN patient outreach can optimize your revenue collection.




OoN with Patient Outreach

BCBS Contracted Rate



BCBS Allowed OoN Average



Payment to Patient



Collection Target (70%)



Patient Collections (40%*)



Net Collection




*Note that in this example patient collection percentage is lower than the insurance collection percentage because in an attempt to get the insurance check out of the patient and get a prompt payment, laboratory billing companies are often willing to negotiate on the balance.

As long as you have a patient outreach program in place, you can clearly exceed what you would have collected in-network.  So from a purely financial (revenue) perspective, being out-of-network is clearly a better choice.

Collateral Benefits

Sometimes, in-network status can also deliver value that might not be readily apparent. There is value in being contracted that extends beyond what revenue you immediately collect from those samples. In fact, it may sometimes be worthwhile to be willing to generate less collections (revenue) from BCBS in order to be in network.  And that may contribute to your bottom line in ways you need to account for. Some of these benefits are:

  • Access to a new-patient pipeline: it may help your position and standing in the marketplace to be an “in-network” provider, making it more likely for you to get business from referral sources.
  • The “loss-leader” effect: money-losing lab tests from BCBS may lead to other, more profitable tests from other payers.
  • Avoiding the time and hassle of dealing with angry or confused patients or frustrated referring providers that take their business elsewhere.

Don’t underestimate the value in an increasingly competitive marketplace of being able to market your laboratory as being “in network”.

In order to avoid the increasing hassle of being completely out of network many labs are adopting alternative strategies like buying in-network labs, or starting up under a pathologist to get in network under their contract. If this is not an option, the decision to contract with Blue Cross/Blue Shield comes down to which is of more value to your business.

If you want to maximize your revenue per sample, stay out of network as long as you have a process in place to collect on those checks going to patients. If the marketing benefit you get from being in-network outweighs the forgone revenue, then contracting is probably the way to go.

Will Outsourcing Your Billing Really Bring In More Money?

­Medical billing, like many industries, has had its share of debate over the merits of outsourcing the work. Some providers have experienced sub-par medical billing companies that only go after the low hanging fruit, while others have found that outsourcing has saved their practice and they will never go in-house again.

But what is really happening? What is the real value in outsourcing your billing?  

The Cost/Value Relationship

We all have faced this question in our everyday lives: “At what point do I pay more to get the best quality work?”. Merchandise of greater quality will deliver better value in the long run versus an inexpensive product that fails quickly. Yet, at the same time, it costs more time, money, and resources.

A quality pair of shoes or a reliable car might be examples of this. You pay more up front for great quality, but they prove to be reliable and dependable, making your ROI much higher than going with the “low-cost leader”.

So, cost and value are distinctly different. And value (not cost) is what we are trying to maximize, whether we are cognizant of it or not.

There is little doubt that outsourcing can drastically save businesses like labs large amounts of money. The logic, so it has gone, is that labor costs in countries like India and the Philippines are drastically lower, so there is money to be saved, and this is no different from the laboratory billing arena.  

Those economies invest in infrastructure and begin to produce better-educated, motivated workers. The thinking is that the outsourced workforce can compete with American workers in terms of their quality of work and even their English-speaking skills. This mindset makes up the cost-based denominator of this equation.

Nowhere is the cost/value relationship more apparent (and more critical) than in medical and laboratory billing services. After all, if you are hiring a service to collect money for you, then the value of their work is immediately apparent.

The math is pretty simple – your collections/revenue goes up or it goes down. If costs go down, but revenue goes down even more, then you have received no value (or perhaps negative value).

“Lower cost leader” is the hallmark of sales pitches by professional billing companies, especially Indian (Business Process Outsourcing) BPO’s, which may claim as much as 60% cost savings. But cost claims don’t help you assess the value of the service. In fact, such claims can be mask the true value delivered by outsourcing services.

Here are some examples of how lower costs can actually cause a decrease in value:

  • Labor rate vs. gross hours: offshoring may provide a lower hourly rate for labor, but it is not wise to assume that the total hours worked will remain constant. The complexity of your medical billing needs may anticipate increases in labor assigned to your account that could drive your net costs up.
  • Overhead costs: in some cases, claims based on saving overall costs will focus on hourly labor rate and fail to take into account the “real” cost, which includes overhead items such as benefits, software, management, etc.
  • Fixing errors: mistakes in billing are expensive in less apparent ways.Not only in potential lost revenue, but the direct cost to identify and fix problems can be quite costly. This can include large numbers of billing team members, management, overall hours, and other resources dedicated to identifying and solving problems, potentially over the course of months.
  • Patient experience: cutting costs may actually have a negative impact on your patients. If they have to wait longer for issues to be resolved, or if they have a tougher time communicating successfully with the right people to address issues, you could potentially lose patients, and thus revenue.

Measuring ROI Rather Than Cost

If “lowering costs” to be the primary goal in outsourcing your billing, then you have likely missed the bigger picture. You can actually achieve lower costs and be worse off financially as a result.  

A more useful measure of performance is return on investment (ROI). Regardless of whether outsourcing reduces your costs, it will have either a negative or positive impact on your collections, so when you add cost savings to the change in collections, there will be a net return (positive or negative) that is distinct from costs.

Once you frame your assessment in ROI terms, you can begin to make a more informed decision about any potential benefits of outsourcing your medical billing. Here are some important aspects of an “ROI-based” evaluation.

  • Collection performance: selecting a high performing medical billing company is critical. Otherwise, not only may you not improve your collections, but you might go backward. If your in-house billing team is performing well, then any outsourced medical billing service, even a great one, may be unable to improve significantly on that performance.  On the other hand, if performance is mediocre or sub-par with the in-house billing team, there may be a great opportunity for financial improvement.
  • Performance measurement: assessing whether collections are actually going up or down, and for what reason, can be a vastly complex and difficult thing to do, but you should make it a priority to understand how to measure performance, what to measure, and what it will tell you.  Any outsourced billing service should have proscribed KPI’s (key performance indicators) and provide performance reports on a regular basis. It might make sense to arrange for periodic audits by a third party as well.

Evaluating Your True Costs

Although it seems self-evident that you need to identify your current billing practice costs before  evaluating if you are going to save money by outsourcing, it can actually be quite challenging to assess your costs.  

Here is a checklist of items to consider when calculating your in-house costs:

  • Office expenses
  • Software and software maintenance costs
  • IT staffing
  • Billing costs
  • Direct staff costs
  • Overhead costs
  • “Hidden” variable costs
  • “Opportunity” costs


Making a Valid Cost Comparison

You may well achieve significant cost savings with outsourcing, but as we have discussed, you can’t make an informed decision based on cost alone. Performance differences often vastly outweigh cost differences, so the cost must be evaluated against a service level that is comparable to or better than the performance you are getting in house.

Most medical billing companies charge based on a percentage of collections. Therefore, this makes an “apples to apples” price comparison even more critical. This means you need a deep understanding of your own costs, because it will allow you to make an effective comparison.

In order to make such a comparison, follow these best practices:

  • Know your costs as a percentage of your collections: once you have established your costs based on the above list, add it all up and divide it by your total collections on an annual basis. This will be a lot of work, but the payoff of having a basis for direct comparison when evaluating outsourcing options is vital to making the most informed decision. If the billing company breaks out line items costs (not all of them do), use those for a more fine-tuned comparison. You might even find places where you are overspending or unbilling services.
  • Make sure the outsourced company knows and evaluates your business: any reputable medical billing company will want to analyze your practice before submitting pricing. If they don’t, consider that a red flag. All practices are different, and things like volume, payer mix, procedure mix, and services required, among other things, can swing the price significantly. Their pricing should reflect a comprehensive understanding of your needs.
  • Evaluate management resources discretely: some medical billing companies provide a lot of management resources like data analysis, coding consulting for the doctors, fee schedule consulting, process improvements, etc. These may be difficult to quantify, but you can improve your ability to evaluate them by quantifying your own management costs.
  • Evaluate any differences in EMR/EHR software: if you move to an outsourced billing solution and the company has a sub-par billing system (you know the companies that use Medical Manager for example), it may require more labor (and more expense) to maintain your current collection levels. And the opposite may also be true. If the new billing company implements software better than yours (and it often will be), you should factor that in as well.

Benefits of Scale

In many, if not most industries, scaling your business brings efficiency and other benefits. Laboratory billing is no different. Many billing companies have a real argument in their favor here. General medical billing is all they do, and they typically do it on a scale you could never match.

But even if you have a dozen in-house billers, then chances are the people on your billing team are more generalists than specialists. They are essentially required to wear many hats and understand several aspects of the laboratory billing process.

At a larger scale, though, outsourced billing companies could specialize and each member of the team might have one function and the time to learn all the nuances of that function. Theoretically, such a team would be more efficient.

Some of the potential benefits of scale which laboratory billing companies can provide are as follows.

  • Efficiency translates to lower costs: an outsourced laboratory billing company can deliver an efficiency premium which means lower costs and/or more resources available to generate better financial results.
  • Greater leverage in overhead spending: with scale, outsourced billing companies may be able to justify the purchase of more sophisticated software systems, or invest R&D dollars into new processes and systems that few physicians or even provider organizations could never afford.
  • Employee skills and specialization: billing companies have the resources to make sure each function of the process is taken care of by an employee who is specialized in that step of the process. The employees who post payments only post payments while the coders only write code. This keeps costs lower and productivity higher.
  • Concentration of talent: outsourced billing companies can locate in places where labor is cheap and plentiful, while a medical organization likely needs to locate it’s billing near its patients.
  • Flexibility: large billing organizations are better equipped to handle fluctuations in volume within your practice. Scale allows medical billing companies to absorb these fluctuations more easily. They have the ability to expand or contract their staff, or the staffing on your account, more rapidly and smoothly.
  • Human resources efficiency: medical billing companies are likely to have larger, more skilled,and more experienced HR departments. They will certainly be well versed in recruiting, hiring, onboarding, training, education/accreditation, and such.
  • Highly skilled managers: large billing companies should have the resources (and the motive) to hire seasoned, skilled managers with deep expertise. These skilled personal can help you make sure all processes are running smoothly.
  • Industry acumen & consulting: medical billing companies have a vested interest in accumulating comprehensive institutional knowledge of the field, including compliance, case law, fee schedules, etc. Through their access to many practices, they may have or know of best practices that can significantly increase your collections.
  • Purpose-built billing software/systems: medical billing companies can select their software for its effectiveness in workflow and collections, so there is likelihood to have a better system that will increase your collections.
  • More efficient interfaces: the benefit of an interface means that productivity of the billing company is improved significantly with faster access to records and fewer missing or incorrect patient charts.
  • Staying current with compliance & regulation: it’s a daunting task for any practice to keep abreast of changes in coding and reimbursement, let alone changes in laws governing health care, like ACA and MACRA. A medical billing company can more easily afford a full-time compliance team, which can make your life a lot easier.
  • Timely & useful analytics: medical billing companies will more often be able to purchase or develop best-in-class BI (business intelligence) software, which provides you with better reporting.

If you are considering an outsourced medical billing solution, here is the bad news: you have a lot of work to do before you can make an informed decision. But the good news is, if you do the work, you have the potential to save a significant amount of money, increase your collections, or in some cases both.

While much of the analysis seems to focus on the cost-saving benefits of outsourcing due to low labor costs and economies of scale, you are not necessarily better off going that route. While many billing companies tout absurd savings of as much as 60%, this is unlikely to be the case for your business.  

More likely, improvements in collections have the potential to significantly impact your bottom line. Additionally, you will only benefit if you can find a high-quality medical billing service that fits with your practice.

In the end, you should only outsource if you find a medical billing service that can demonstrate that it has the ability to generate as good or better collections than an internal billing department. Either way, the choice is not an easy or a simple one.  

Be deliberate and patient in your decision process. Don’t move hastily in the interest of slashing costs.  As the saying goes, never be “penny-wise and pound-foolish”. The more time and care you take to evaluate, the more likely you are to achieve great financial results.

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