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In today’s cost-conscious, inefficiency-laded, reimbursement-challenged healthcare environment, clearly it’s becoming a case where the left side of the balance sheet knows what the right side is doing and vice versa.

For the few who are doing it and the more who recognize the need to do it, the bottom line is that expense management may be important but teaming it with revenue cycle management is integral. Materials management must contribute directly or indirectly to top line financial results.

While materials managers may be able to explain the financial boundaries for which they’re responsible, including supplies, equipment, services and staff, they may be hard pressed to comprehend the concept of revenue cycle management and how the two areas may relate.

On a fundamental level, "revenue cycle management is the balance between what a product costs and what the hospital gets reimbursed for that item," noted Robert Bean, revenue cycle manager, patient accounts, Lawrence (KS) Memorial Hospital. To get a "true picture" of how revenue cycle relates to supply chain requires a global perspective rather than a per-payer or per-product view, he added. That’s because there are so many nuances with each item or payer "that nothing is ever simple in terms of reimbursement."

In a nutshell, revenue cycle management encompasses the entire process spanning payer contracts and patient charges to accounts receivables and payer reimbursement. That mix includes payer and vendor contract negotiations, patient charging and coding, billing, collection, strategic sourcing and communication. It links the chargemaster in administration to the item master in materials management, reconciling the price paid for a product to consumption and chargeable "mark-up" to the patient. Ideally, the two systems are linked electronically and seamlessly share accurate data; realistically, it tends to encompass a manually driven, but typically spreadsheet-related exercise that may involve error-prone data.

From the expense side, it’s all about reducing costs. From the revenue side, it’s all about maximizing reimbursement.

"We want to get paid for everything, and we don’t want to pay more than we need to for anything and keep overhead in check," said Siobhan Mee, director, revenue cycle management Maricopa Medical Center, Phoenix. But the process tends to be more complicated than that as Mee acknowledged she has to maintain a delicate balance due to Maricopa’s safety net status for patients that may not have insurance. "We have to look at what are the case charges for something? What’s reasonable? Are we getting paid for what we provide?" she said. "We don’t want to overcharge them."

That’s why it’s so important for Mee and her counterpart on the expense side, Steve Ellis, director of procurement and supply chain, to work together "to complete the puzzle," Mee said.

"We focus on different pieces of the picture, looking at what might happen on either side," she added.

Mee and Ellis represent a small but burgeoning breed of hospital managerial partnerships. Ellis believes how he functions with Mee may be rare right now. "I see materials management and revenue cycle management pretty much being and doing their own thing and don’t meet the way they should," he told Healthcare Purchasing News. "Basically, materials management is a service line. We deal with and manage expenses. But if that were it we’d not be in business for too long."

Much of the relationship hinges on the "block-and-tackle" or "checks-and-balances" interaction with clinicians. "Materials management professionals need to be aware of the impact on the revenue cycle," Ellis said. "We cannot just operate on a whim based on customer needs or expectations. We can’t just go and acquire what they’re asking for. If the technology isn’t billable or doesn’t generate an appropriate amount of revenue, then we need to question it. A lot of times we are told something will bring in new revenue but when you dig a little deeper you learn that’s not the case. As good stewards we have to understand the impact products have on the revenue stream. That’s why we need to partner with revenue cycle management to validate what we’re bringing in as to how it affects the bottom and top lines. It all starts with gross revenue."

Joe Volpe, vice president, supply chain, Wheaton Franciscan Services Inc., Glendale, WI, noted that one of the missing links is the cost of physician preference items, which tend to be included in supply chain data. "Most hospitals do not interface the [materials management information system] with patient accounting for these types of supplies," Volpe said. "There needs to be coordination with both the payer contract as well as the patient accounting staff so everyone knows what the key cost drivers are. If the costs are high the payer contracting staff can try to negotiate payments that cover our costs.

"In many organizations, supply chain is part of the revenue cycle as they are involved in charging the supplies to patients," he continued. "In our organization, we stopped charging for the lower cost med/surg products several years ago as the cost to do so was greater than the revenue it generated."

Admittedly, the partnership between Mee and Ellis began with several advantages. First, both have known each other and worked at Maricopa for a long time – Mee for 25 years, Ellis for 10. Second, both report to Maricopa’s CFO, who advocated their working together and requested that Ellis recruit Mee to actively participate in the organization’s value analysis committee.

With an established relationship and the CFO’s blessing, both had to start operating on the same page, generally understanding each other’s areas and ironing out how either would contribute to the process.

"Both Steve and I knew there was a problem," Mee said. "It’s not like one side recognized a problem and the other didn’t. We knew we had a substantial problem. Then we had to determine how big of a problem it was."

They created a multidisciplinary committee, including key people from materials management, revenue cycle management and the high-dollar volume areas, such as the operating room, burn unit, interventional radiology and the cath lab. Ellis brought inventory lists from those areas to compare with expense reports and charge lists.

"We asked [the clinicians] how they were getting supplies?" Mee recalled. "In a number of cases they said they would simply call the vendor, get an invoice and fill out a check request. It confirmed what we had suspected. Basically, they were going around and outside the system.

"Then we had to find out how they were getting information about these products if they weren’t going through materials management, which would have raised some red flags based on the volume of calls," she continued. "They told us that the vendors would come to the hospital. So the first thing we had to do was shut down vendors coming into the hospital without [privileges]. We did not want vendors having free access to the facility and the clinicians. Steve wrote a comprehensive vendor policy, which helped reduce the problem by 80 percent."

From an expense management standpoint, such "maverick" buying would seem to be materials management’s responsibility to identify and control. But Mee, equipped with the right data tools, was able to demonstrate the revenue impact of these actions – whether these purchases were being offset by appropriate reimbursement codes. They were not.

"We put our heads together to solve the problem," she said. At first, it was arduous and time consuming because Mee had to manually use spreadsheets and pivot tables to map data from the item master to the chargemaster and match that with expense data from the clinical departments. It turned out to be a very labor-intensive process that took four months to prepare. But one underlying problem complicating progress was that data in the item master were not accurate. Consequently, Ellis embarked on cleaning up the item master, matching product codes to the general ledger.

In addition, Mee contracted with MedAssets Net Revenue Systems’ CrossWalk product in April 2006 to analyze and compare chargemaster and item master data with closed receipts. Essentially, CrossWalk links the item master with the chargemaster to make sure costs are reasonably aligned with charges based on defensible markups and identifies exceptions.

Now what took four months to complete can be accomplished within four days, which is when Mee learns about any discrepancies. For example, CrossWalk uncovered an incident in March when a pacemaker was acquired independently of materials management and the wrong product code was used to identify it. "We called materials management to inquire about the implanted device and learned somebody used an open PO from 2002 to get it," Mee said. "With CrossWalk we were able to see find this and identify which patient. Before, we were lucky if we would have even caught it."

By using CrossWalk and the Claims Charge Audit program, Maricopa has generated a net revenue increase to date of $1.2 million, based on working with the correct data on supplies, procedures and charges, according to Mee.

If anything, the tighter controls has heightened awareness among the buyers and keeps the communication lines open. "Both sides are talking to each other," Mee said. "If something looks the least bit like it touches the patient or if we see that someone’s buying something that may not be properly coded for charging, we’ll call materials management. Steve will call me when he gets a request for a new product to determine whether we can charge for it or it becomes part of the operational expense of the organization. We help each other in understanding costs, usage and how we can recoup our investment. We’re not going to delve too much into each other’s world beyond that."

While it may be easy for materials managers to claim that reimbursement issues is not part of their job that’s the wrong attitude to have. Certainly the CFO has a lot to do with any attitude correction and can help you get over that mindset by making it – albeit to a limited extent – part of materials management’s job, according to Ellis.

"A good recipe is to have materials management and revenue cycle management report up through CFO," he said. "That way there’s a common alignment and structure. But that’s not the case in all hospitals. Materials management may report up through the COO. Even if it’s through the COO you still shouldn’t have the attitude that it’s someone else’s job. It’s an interdisciplinary job. Historically, materials management focuses in on the expense side and meeting customer needs for the delivery of products. But that’s just part of the picture. We really need to be working with everybody. You can’t pick and choose."

Materials management focusing on revenue only makes sense, Volpe insisted. "If supply chain [management] is not aware of what we actually get paid and what the costs are, we may waste time negotiating a contract that does not meet our needs, i.e., the cost is greater than reimbursement," he said.

Phil Mears, senior vice president of Catholic Health Initiatives, Denver, emphasizes the importance of materials management’s involvement in the revenue cycle because the media consistently make pricing and charge management a focal point, particularly for over-the-counter type items. "We’ve all heard of the $5 aspirin, but no one ever seems to relate it to the local garage that charges a fee to every customer for the costs associated with waste disposal," he said. "No one ever looks on their hotel bill for their portion of the maintenance worker’s salary, or the elevator contract; but for some odd reason, we’ve always covered the costs of doing healthcare business with a room charge and a mark-up of supplies."

Sometimes it’s necessary simply because the issue may be overlooked or the connection between costs and charges doesn’t go beyond the surface. "I found that no one else was really paying attention to the big picture," said Allen Caudle, partner, Appleseed Healthcare Resources and former vice president of supply chain management at Swedish Medical Center, Seattle. "[When no one else seems to take the lead, it’s a great way to increase the exposure of the supply chain."

Ironically, materials management may help determine what the facility’s appropriate mark-up for a charge should be. "Materials managers have the direct knowledge of the product costs and the relationship with the vendors to negotiate better cost pricing," Treat said. "Many times the vendors can also help hospitals determine what the patient price should be for the product to maximize the revenue realized for that item." That may seem dangerous but not if the hospital maintains control of the process, she added. For example, in Lawrence Memorial’s case, the hospital wanted to bring in a new, but very expensive, product.

"The vendor had an entire department focused on what the actual reimbursement payments have been from particular insurance companies and Medicare for this particular product," she continued. "So simply applying our mark-up schedule in this case did not assure we would recover that amount of money from Medicare and/or insurance companies. After meeting with the vendor as a group we [director of nursing, materials management and revenue cycle management] decided to take the vendor’s recommendation for what we should charge the patient for this particular item. I think as long as we do our own research and don’t hand over the hospital’s strategies and mark-up schedules, it shouldn’t be dangerous at all to have these types of conversations with the vendors."

One key disconnect between the two areas involves billing codes versus supply costs, according to Volpe. "It is often difficult to understand what supplies are billed under specific codes and what the other costs are, as well as what we are paid," he said.

"What [the chargemaster] doesn’t take into [account] is the actual price paid, which, dependant upon a facility’s cash management strategy, could actually be a percent or two lower for pre-pay or quick-payments. It also ignores rebates, which are usually applied in concert with cost reporting requirements, which apply them as a credit to total supply expense and don’t require application at the line-item level."

Another challenge to the link between materials and revenue cycle management is that their respective information systems may not be interfaced or integrated.

"In our situation, our item master in the MMIS and the revenue cycle chargemaster were two separate systems," Ellis said. "There was no connectivity. Any remediation was done manually. One area can’t do that. Both need to contribute. It’s an underlying challenge. Whether it’s done manually or electronically, it has to be done to ensure products acquired and utilized are charged appropriately." Otherwise, a facility makes the mistake of relying on financial pro forma estimates for ROI calculations. "You need who knows the payer mix, what we can bill for and what the actual ROI will be to achieve success," he noted.

Any relationship between materials and revenue cycle management should be done casually and professionally, Mee advised, but with respect and some degree of sensitivity. "It’s not a safe bet to walk over to materials management and ask them why they can’t get the item master correct or for them to come to us about the chargemaster," she said, laughing.

At Maricopa, Mee approached Ellis to collaborate. "From an organizational perspective, it’s more often than not going to come from the revenue side because that’s where the money is coming in," she said. "On the materials side, supply savings is not as compelling [an argument] as net revenue generation to the CFO."

Materials managers simply aren’t as learned or skilled on the revenue side, Ellis admitted. Understanding how to work with Medicare, Medicaid and payers is not part of the training. "We should be familiar with it but it’s not something we generally learn as we work up the ladder," he noted. "That’s why we need to partner with revenue cycle management."

Petty turf battles shouldn’t be a factor, he emphasized. "In my opinion, it doesn’t matter [who approaches whom," he said. "Somebody needs to take the lead. We’re just not in charge of managing supplies and purchasing. We need to be leaders and pursue those relationships. Identify the person and reach out to them and set up that relationship. It doesn’t matter who takes the lead. If you want to be a leader or perceived as a leader then don’t wait on others."

Treat agreed. "Either side should start the conversations. Neither side should really manage the process. They both play very important roles," she said. "In our hospital we have a Charge Master Committee. I would really recommend that every hospital have this type of committee. It is a multi-disciplinary team that focuses on reimbursement and patient charging. So if I were to join a hospital and I were responsible for either the materials or revenue side, I would first see if there already existed a committee that focuses on these types of issues. If there was not one, I would work with the director of patient accounts or the chief financial officer and the director of materials management and get one started. In healthcare you have to be comfortable seeking out others in other departments."

From a supply chain perspective, "understanding what we are paid and what the key direct cost factors are can be powerful leverage in supply contract negotiations," Volpe said. "I’m not sure it is important who takes the lead and manages the relationships as long as it gets done."

Echoed Caudle: "One of the pitfalls is failing to make the first move."

A rock-solid partnership between materials and revenue cycle management can be valuable to a facility largely because of the control it brings to the contract negotiation process.

"Working with your payer contracting folks you can help them create better contracts with carve outs for some of the high specialty implants and drugs," Caudle noted. "This helps the bottom line with fixed payments. Working with the revenue specialists who actually collect the data to bill the payers is important so every possible chargeable item is counted and billed. Also, they can steer you towards products that have a higher revenue potential such as a disposable versus a reusable device."

In fact, during his time as a senior supply chain executive, Caudle maintained strong bonds between his department and revenue management to bolster the hospital’s bottom line. Like Maricopa, Swedish’s director of revenue management participated in two primary physician preference item value analysis teams, he noted. "The input she provided not only increased our revenue, but many times we did not bring in a new item because her analysis showed that no additional revenue was available with an increase in product price," he said. "Another way she helped us increase revenue was suggesting that sometimes a disposable product could create revenue while the same reusable product would not."

Caudle also recruited the contract director of health plans and other external payers to create "carve outs" for new technologies, he noted. "This would pass the increased cost on to the third party payers and preserve the small bottom line of the procedure to the institution," he added.

Ellis characterizes Mee’s value analysis committee participation as a key advantage. "Otherwise, we are at the mercy of the people making requests," he said. "With Siobhan we can do due diligence. She’s readily accessible to dispute assertions. She’s working side-by-side with me, ensuring that what’s coming to us is accurate. Vendors can make some pretty broad assertions. That’s what they do to get the sale."

Mee agreed that they form a unified front in dealing with clinicians, but not in an adversarial way. "As a safety net hospital we have to be sensitive to socioeconomic needs," she said. "Some clinicians may want [a procedure] off the books because it’s not fair to charge certain patients. But everybody has to be charged something."

Working together can help each do their respective jobs better, Volpe said. "Supply cost information helps revenue staff negotiate reimbursement levels or carve outs," Volpe said. "Revenue staff can provide the direct and indirect cost data that help supply chain staff understand where the supply costs need to be in order to make money."