Three ways to ease the pressure on health system revenue cycles

September 10, 2024The mounting strain on health systems’ financial performance is forcing revenue cycle leaders to make difficult decisions. For example, declining median operating margins and heightened risk of credit downgrades have increased pressure on not-for-profit health systems to enhance cash collections while minimizing costs.¹

This financial strain is compounded by a growing administrative burden across the revenue cycle. By the end of 2023, 15 percent of initial claims were denied for payment, up from 9 percent in 2016.²  Additionally, administrative tasks such as prior authorizations—at an average rate of approximately 45 per physician per week—now have an average cost of $6 to $11 per claim for care delivery organizations.³ This trend is stretching already-scarce resources as demand grows for clinical documentation and justification, payer engagement, and process redesign to accommodate new requests from payers.

The evolving regulatory landscape adds an additional layer of complexity to revenue collection for health systems. For example, the Centers for Medicare & Medicaid Services (CMS) guidance regarding Medicare Advantage plans and reviewing claims under the “two-midnight presumption” (which doctors use to classify if a stay has inpatient or observation status based on whether it spans at least two midnights) may increase the burden to satisfy medical-necessity reviews.⁴

Finally, a cyberattack on United Healthcare Group’s Change Healthcare caused widespread financial disruption across the US healthcare system and exposed revenue cycle vulnerabilities that will require considerable mitigation,⁵  especially while ongoing cyber events continue to affect health systems.

Available tools could help improve revenue cycle performance

Health systems have more tools than ever to confront the challenges they face and improve revenue cycle performance. For instance, research suggests that generative AI (gen AI) could lead to savings of 5 to 10 percent in US healthcare spending—roughly $200 billion to $360 billion annually (2019 dollars).⁶  For health systems’ revenue cycle services, gen AI shows immense potential to complement human efforts requiring cognitive abilities such as coding, prior authorization, denials management, clinical documentation improvement, and utilization management.

However, excitement for gen AI is restrained by the same complexities that have historically slowed healthcare’s scaled implementations of other tools, including electronic health records (EHRs) and telehealth services. Risks associated with privacy and regulatory compliance, change management, and patient safety can quickly overwhelm management capacity and delay decision making regarding gen AI.

In the meantime, health systems continue to struggle to extract maximum value from tools they adopted more than a decade ago. Although automation and machine learning are widely available and can be cost-effective, internal McKinsey analysis reveals these tools remain underused in high-value areas such as enabling timely requests for prior authorizations, checking on the status of submitted claims, and managing denials of claims by payers.⁷

Likewise, health systems have been slow to incorporate capabilities from leading vendors domestically and abroad, despite peers and revenue cycle service companies demonstrating meaningful success. Health systems could also double down on fundamentals. For example, implementing continuous quality improvements and redesigning workflows to maximize existing EHR functionalities can drive tremendous value amid uncertainty.

Three actions could quickly boost revenue cycle performance

The challenges health systems face today have been long in the making and will not resolve on their own. The pace of technological innovation and its accompanying complexities are also unlikely to slow. At this critical juncture, three actions will differentiate the highest performers:

Partnering effectively and deftly. The health systems with future-ready revenue cycles will be those that excel at assessing, evaluating, contracting, and negotiating partnerships with an expanding ecosystem of services and technology vendors. Successful partnership models will stand out for their ability to adroitly incubate innovative solutions using a champion-challenger model, whereby multiple options are explored and the most effective are chosen to be implemented at scale. Health systems in the future will likely have many more external partners than they do today, working on projects ranging from small-scale pilots to fully scaled solutions.

Enabling cross-functional collaboration to improve results. Securing compensation for care is increasingly entwined with activities outside the revenue cycle function. To reduce claims denials and time spent on accounts receivable collections, for instance, health systems could evolve their operating models to support collaboration between the revenue cycle and the patient- and caregiver-facing functions, including utilization management, care coordination, and managed care. This would also involve an increased amount of strategic collaboration with managed care functions and potentially even payers directly.

Harnessing multiple sources of data to unlock insights. More than a decade after widespread investments in EHRs, many health systems have yet to enhance performance by fully capitalizing on available data. Successfully navigating the massive wave of upcoming innovative technologies to integrate data across systems and distill insights that propel performance requires developing mature data infrastructure, governance, and analytics capabilities.

Revenue cycle leaders who resist the temptation to put off complex decisions and, instead, act swiftly and invest in differentiating capabilities will be best positioned to reap disproportionate rewards and contribute overall better performance for their health systems.

Michael Peterson is a partner in McKinsey’s Dallas office, Sanjiv Baxi is a partner in the San Francisco office, and Sarah Calkins Holloway is a senior partner in the Seattle office.

_{1. U.S. not-for-profit hospitals and health systems outlook 2024, Fitch Ratings, December 5, 2023.}

_{2. “The Change Healthcare 2022 revenue cycle denials index,” Change Healthcare, 2022.}

_{3. David M. Cutler et al., “Active steps to reduce administrative spending associated with financial transactions in US health care,” Health Affairs Scholar, November 2023, Volume 1, Number 5.}

_{4. “CMS provides ‘two-midnight rule’ guidance for Medicare Advantage plans,” California Hospital Association, February 14, 2024; “Frequently asked questions related to coverage criteria and utilization management requirements in CMS final rule (CMS-4201-F),” CMS, February 6, 2024.}

_{5. David M. Cutler et al., The potential impact of artificial intelligence on healthcare spending, National Bureau of Economic Research, NBER Working Paper Series, number 30857, updated October 2023.}

_{6. McKinsey RevEx 2023 Buyer’s Survey, n = 290.}

_{7. “UnitedHealth Group updates on Change Healthcare cyberattack,” UnitedHealth Group, April 22, 2024.}