5 questions (and answers!) about net revenue

Do you know everything you need to know about net revenue? Maybe you do. Maybe you don’t but are afraid to ask. We’re not afraid. We asked Kodiak net revenue specialist Bryan Rector five questions about his favorite healthcare finance topic.

Net revenue, net revenue, net revenue, net revenue.

It’s all people talk about in the finance and revenue cycle departments at healthcare organizations. But do they know what they’re talking about?

We know someone who does. Bryan Rector. Bryan is vice president, finance and reimbursement, at Kodiak Solutions, and one of our many net revenue specialists helping healthcare organizations across the country manage this ultimate healthcare key performance indicator.

We asked Bryan five questions about net revenue that you may be afraid to ask at your next finance or revenue cycle meeting.

Kodiak: What is the definition of net revenue?

Rector: Net revenue is gross revenue (charges) less deductions (contractual agreements with payors, charity care, bad debt, denied claims, and administrative adjustments).

Kodiak: Do all healthcare organizations calculate net revenue the same way?

Rector: There typically are two approaches: one, an income statement approach, and two, a balance sheet approach.

With the income statement approach, healthcare organizations focus on run rate, which is using current performance to predict future performance, and ensuring net revenue aligns with expectations and their budget plan. There is a balance sheet “true up,” or reconciliation, on a regular cadence, such as quarterly, that will flow through the profit/loss statement and affect the run rate.

The balance sheet approach is what Kodiak Revenue Cycle Analytics is based on. The benefit of this approach is that the balance sheet, or reserves, is assessed each month, and your confidence in net accounts receivable on the balance sheet is high. The downside is changes on reserves flow through to your P/L each month. That can create more variability in run rates on the P/L from month to month. However, this approach gives leaders the data to better understand net revenue from month to month and to drill into the “why” what’s happening is happening and address it sooner.

Kodiak: How important is net revenue to the overall financial performance of a healthcare organization?

Rector: Extremely important. Net revenue for a healthcare organization is essentially synonymous with gross revenue for a manufacturer or retailer. If expenses exceed net revenue, the organization is running at an operating loss and must make some difficult decisions to either improve net revenue (generally seeking more patient volume or renegotiating payor contracts if possible) or reducing expenses.

Kodiak: What is the one thing that affects net revenue the most, up or down, from a revenue cycle KPI perspective?

Rector: It’s challenging to boil it down to one thing, but I’d say denials have the most potential to affect net revenue. Denials generally are revenue the organization expects to collect based on their services provided to patients, yet a payor denies the claim, in full or in part, for various and sometimes arbitrary reasons. That’s why the balance sheet approach I described is better for most healthcare organizations. It gives them the ability to know where denials are happening in real time and aggressively address them internally with their teams or externally with their payors. Getting those denials down as low as possible will have a huge positive effect on an organization’s net revenue.

Kodiak: What type of technology is most important when it comes to tracking net revenue?

Rector: Shameless plug, but technology such as Kodiak RCA is critical for numerous reasons. Here are five things you can do with it that you couldn’t do or do well without technology.

• Understanding the past via hindsight analysis. How did your organization reserve accounts a year ago? And how did those accounts ultimately resolve?
• Setting reserves based on historical collections, denials, bad debt, and charity experience.
• Exercising confident professional judgement. Basing reserves on history sets a great baseline, but leaders need the ability to adjust reserves when the environment today doesn’t align with history (for example, during the early days of COVID).
• Reporting and understanding net revenue down to the account level. Without this capability, and given the complexity of hundreds of contracts with various payment rates and methodologies, the net revenue story for one month may not become clear until you’re already into the next month.
• Budgeting and forecasting net revenue also present challenges when users need to chase down multiple data sources and calculations occurring on spreadsheets that lack version control, etc. Having everything in one system with access to the right data at a user’s fingertips allows for not only accelerating the preparation of the annual budget or rolling forecast, but also allows users to quickly model various strategic initiatives the organization may be planning.
  
  

Our many thanks to Bryan for telling us and healthcare finance and revenue leaders across the country five things we may not have known about net revenue but were afraid to ask.

Do you have more questions about net revenue? We have just the event to answer all your questions: the 2024 Kodiak Healthcare Summit in Nashville and virtually Sept. 22-25, 2024. The four-day event will offer several educational sessions focusing on net revenue, including:

• Developing a meaningful narrative with Kodiak's Custom Net Revenue package
• Net revenue through the looking glass: Planning, budgeting, and forecasting
• Adapt your revenue cycle operations to drive net revenue improvements
• Net revenue: Understand the impact of service mix shifts

You can even play a game of Net Revenue Jeopardy! Bring a copy of this article to help you with the answer. It’s not cheating.