July 24, 2015

ICD-10: Two Sides to the Revenue Coin

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I would like to propose that there are two sides to the revenue coin when considering the impact of ICD-10. The first revenue impact, and the one felt more immediately, will be the impact on cash flow (and, correspondingly, revenue).

Now, why will there be an impact on revenue? Well, to the degree that it will take longer to code, bill, and collect revenue, a hospital or a physician will need to have more revenue to operate. On past Talk-Ten-Tuesday broadcasts, we have discussed the issues surrounding cash flow, and I believe that this will have a significant impact on revenue through the growth in A/R caused by coding delays, billing delays, and payer processing delays.

While some of this impact may be short-term, I believe that providers, both hospitals and physicians, will see a permanent increased need for working capital with the ability to cover at least 15-20 days. This means that even when the conversion to ICD-10 stabilizes, this increased need for cash will remain. For an average-sized hospital, this can be a sum of $15-$20 million.

The second side of the revenue impact will be on what is most commonly known as revenue: the amount of funds reflected in the financial statements. From my perspective, this will be much harder to measure during the early months post-ICD-10 implementation. Even though many hospitals have completed projections on the revenue impacts of ICD-10, the number of variables that determine actual revenue is significant and can vary substantially from year to year.

Variables like case mix, payer mix, and even patient mix are just a few examples. Couple this with the typical lag associated with billed revenues compared to actual payments, and then add a potential increase in denied and downgraded claims, and determining actual revenues in the early months following implementation will be a difficult task.

My recommendation would be to take a conservative approach in calculating revenues and develop reserves in order to ensure that future revenues are not overstated. 

So, to summarize, while there may be opportunity for increased revenue over the long term from the implementation of ICD-10, be prepared for an immediate decrease in revenues – both in cash flow and recorded revenue – during the early months after implementation. 

About the Author

Greg Adams is the chief strategy officer for Panacea Healthcare Solutions. He has more than 35 years of experience in the field of healthcare including 20 years experience as a hospital CFO and 10 years as the partner in a healthcare consulting company. He is the past national chair of the Healthcare Financial Management Association (HFMA). His experience includes financial operations, managed care contracting, physician practice management, patient accounting, patient access, medical records, materials management and real estate development.

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Gregory M. Adams, FHFMA

Greg Adams more than 35 years of experience in the field of healthcare including 20 years experience as a hospital CFO and 10 years as the partner in a healthcare consulting company. His experience includes financial operations, managed care contracting, physician practice management, patient accounting, patient access, medical records, materials management and real estate development.

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