An emerging strategic imperative? 3 revenue cycle metrics we’re keeping an eye on

If you’ve seen our State of Healthcare presentation, you’ll know that despite provider margins seemingly rebounding at the top line, it’s an uneven recovery that sees many continuing to struggle in a difficult operating environment. And while specific indicators like procedural volumes and patient mix remain important, three revenue cycle metrics highlight some important additional pressures below the surface that virtually all health systems must contend with. The implications of these measures have ripple effects to other mission critical objectives, meaning that while the revenue cycle isn’t typically the domain of the Chief Strategy Officer, increasingly we think that at least for 2025, it should be an emerging strategic imperative.

1. Patient payments: Point-of-service collections stagnate, while overall patient collections are down:

Recent estimates by Milliman show commercially-insured rates at 190% of traditional Medicare—providing some insight into just how important commercial patients remain to health systems' financial well-being. But with just under half of all commercially insured individuals holding a high-deductible health plan (HDHP), a significant percentage of payment responsibility is borne by the individuals seeking care. This dynamic requires health systems to prioritize patient collections, or risk facing a significant bad debt burden. There was a time when patient collections were a nearly negligible portion of total revenue, but for virtually all systems, those days are well behind them.

Asking for payment at point of service (POS) has long been recognized as a simple and important mechanism for both patient financial engagement and improving the overall bottom line for health systems. How important? Some research I conducted in the mid-2010’s with Lulis Navarro while at the Advisory Board showed that larger payments at POS (targeting 60% of patients with obligations of $2,000 or more) positively inflects the likelihood that patients will eventually pay their full obligations. Data from 2024 indicates that despite health systems making serious efforts to ramp up collections through a variety of means, including use of a wide range of more consumer-friendly digital platforms, collection rates remain at a mere 19% of total patient obligations, just over half of the recommended industry benchmark.

Unfortunately, the headwinds on patient collections don't stop there, as the commercially insured population owed slightly more and had a lower overall collection rate compared to 2023. And while it’s less likely the market sees an uptick in HDHPs akin to the surges of circa 2010-2015, providers must continue to be vigilant operationally to minimize unpaid patient obligations leading to bad debt.

What we’re watching out for:

• To what degree could unpaid commercial patient obligations drag on hospital margins in future?

• How will providers, as part of their access strategy, innovate in “patient-friendly” offerings that improve engagement and satisfaction, while further growing POS collections in 2025 and beyond?

2. Denial pressures: Is the onslaught of initial denials the new norm?

   
   

We’ve been talking to providers, vendors, and technologists about payment denials a lot recently and it won’t surprise anyone in that world that the denial situation is getting worse. Data supports this assertion. Accounts receivable days (AR days) continue rising for many as rates for initial denials have jumped from the high single digits in the late 2010s, to just shy of 12% today—ranging from 7% for traditional Medicare to 10.5% on commercial and as high as 13.6% for Medicare Advantage—with the additional volume ramping up provider’s administrative burden as they continue to fight what some describe as a never-ending game of whack-a-mole. 

The big question many are asking is: why does it feel like denials are coming so thick and fast in 2025?  I should note that this isn’t the first time we’ve heard that question. As recently as 5 years ago, providers reported similar perceptions of escalating denials pressure, driven by a challenging mix of automated denials along with rapidly changing payer criteria that was not standardized across payers. But it seems that the intentional strategy by payers to invest in AI-driven claims adjudication software during the pandemic has upped the ante even further. And with plans facing new financial pressures due to unwieldy utilization, especially within the MA and Medicaid populations, alongside a slowdown in MA reimbursement, payers have every incentive to pull the denials lever.

Providers and vendors are reporting the emergence of new patterns of denials that make both detection and prediction far more difficult. And while some providers have brute-forced their way to best-in-class performance, absent meaningful regulatory efforts to curb denials, AI-driven solutions are likely to be where the market looks next to turn the tide. That said, it may take a series of successful proofs-of-concept to play a major role in broader adoption, particularly given low CFO expectations for any short-term, AI-related ROI.

One thing is clear: the current denials management approach isn’t working well for many, and payers will continue to maintain a technological upper hand until a broader provider-side adoption of AI takes place. 

What we’re watching out for:

• Will the current administration show any meaningful appetite for regulatory approaches that address AI-driven payment denials by payers, or will providers continue to be left to their own defenses?

• Can the burgeoning AI-driven RCM technology market facilitate a meaningful (and principled) reduction in labor force, while also substantially upgrading outcomes at greater speed?

• How will the relatively immature AI-governance at health systems accelerate or slow the adoption rate of AI-driven technologies?

• What executive-level strategic innovation can be brought to the payer-provider dynamic where denials are concerned?

  
  

3. Cost-to-collect: Are we ever going to get revenue cycle cost under control?

   
   

As one hospital finance leader remarked to me recently: “I don’t know how much more cost we can continue to absorb on this front.” Cost-to-collect is tied somewhat intimately to the first two measures we mentioned, capturing expenses associated with a range of patient collections and denials recovery functions such as (but not limited to) labor, outsourcing, IT/software, services and more.

Monitoring this metric is not a simple exercise. First, it’s not readily calculated from common data elements such as claims, so it’s harder to come by via public sources. Second, it’s tough to compare between sources, as the cost allocation for the metric (IT for example) is rarely bucketed in an apples-to-apples manner.

With those caveats in mind, it's nonetheless clear that cost-to-collect has risen steadily for the last decade, at rates outpacing inflation, climbing from an average sub-3% of net patient revenue (NPR) in the mid-2010s, to 3.74% in 2022 (equivalent to $13.1M for a hospital with $350M in revenue) as providers continue to invest in labor and technology to support efforts to retrieve payment for services.  And while a 2022 analysis from AKASA provides a faint silver-lining, showing that hospitals with well-automated RCM have a slightly lower cost profile (~3.5%) the fact is that cost continues to climb, while performance in other key measures, such as denials and patient collections, plateaus or regresses relative to historical. 

The key implication: it’s unlikely that many health systems can repeat the playbook of the past and may need to look for better solutions moving forward.  Could that solution be AI? It’s not like there’s a plethora of obvious solutions promising more dollars and lower labor cost staring revenue cycle leaders in the face. But with high-profile failures like Olive AI still fresh in the minds of health executives, the market may demand some solid first-mover success stories for the dam to really burst on AI-driven RCM adoption. 

What we’re watching out for:

• Will providers buck current concerns on cost-to-collect and look to throw more resources at their key denials and collection challenges?

• Do early adopters of RCM AI showcase a more cost-effective paradigm that highlights efficiency gains that that “first-generation” automation wasn’t able to achieve?

• To what degree are the traditional revenue cycle workflows disrupted and ultimately re-envisioned, as a result of new AI capabilities being adopted?

• Will providers look to third party AI vendors or stand pat on the promise of new RCM capabilities within their existing EHR-ecosystems?

  
  

  Final thoughts

  Despite over a decade of investment, ongoing deterioration in health system revenue cycle outcomes and escalating cost arrives at a crossroad, with the impending payer-A.I. boom threatening to further exacerbate the situation. For providers, minimizing revenue loss becomes a mission critical priority to prevent further margin erosion. Absent major regulation, A.I. stands as the most likely solution to help providers from falling behind in a technological arms race. As a result, revenue cycle sits at the confluence of multiple health system strategic priorities and likely warrants a closer look from Chief Strategy Officers throughout the industry.

  
  

  Next steps

• Sign up for our upcoming webinar where we'll discuss some key challenges in the revenue cycle in 2025, including how providers can think through navigating some fairly choppy waters.

  Want to share your organization's revenue cycle experience in 2025? We'd love to hear from you. Please reach out to eric@unionhealthcareinsight.com