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  • Anders Knox

Deep Dive on Auditors

Providing more information on why it is important to know your auditors.


Data Saints Auditing would like to partner with you as your DRG/APC claim audit firm. We believe transparency between vendor and customer is critical therefore we have created this informational sheet as part of our effort to educate our customer base about important aspects of outsourced complex medical bill auditing.


Background


In the early 2000’s the outsourced medical claim auditing industry grew out of both a compliance requirement and a desire to reduce exploding medical costs. Given the risk aversion of the insurance industry and the unknowns at the time, compensation that was paid to auditing firms was frequently set at a percentage of recoveries (commission rate) guaranteeing the insurance company a profitable outcome.


For our auditing firms’ focus, complex audits that require the securing of a medical record and a human to examine the contents of that medical record, commission rates being paid to the auditing firm used to be as high as 30% of total recoveries. Today 18-22% is the more common range of commission, nominally due to a better understanding of recovery rates as well as incremental technical improvements in automated pre-filtering of medical claims. Yet lower commission rates are mostly due to insurance companies focusing on commission as the main cost and have acted to pressure that percent downward.


Problem


The problem with this commission-based method is that it can hide roughly one half of the cost of your auditing. While auditing firms are mostly concerned with the gross margin of their auditing, Payers should be concerned with dollars recovered per claim. We want to show you with data how this can create a divide between the interest of the auditing firm and the Payer. We will also show you later two easy ways to tackle this divide.

The “individual auditors” are the intelligence engine and the main value of complex medical claim auditing. The auditing firm that is employing the individual auditors is largely managing a straight-forward work flow process that requires HIPPA compliance. When Payers pressure auditing firms’ margins the compensation costs for auditors is the easiest cost for the auditing firm to reduce to maintain gross margins. This creates a hidden negative for the Payers.


Today, an average outsourced auditor will be paid approximately $60,000 ($75,000 fully burdened) and find roughly $2,500,000 in DRG recoveries while a top 25% auditor will be paid $120,000 ($150,000 fully burdened) and find roughly $3,000,000 in DRG recoveries.


Rather than spend $150,000 on one top auditor who then brings in only $540,000 in commissions; Auditing firms have shifted to spending $150,000 a year on two average auditors in order to make $900,000 in commission.


The reason this is bad for the Payer is that if they had two top 25% auditors auditing their claims, they would have recovered $6,000,000 and kept $4,920,000. If they have two average auditors, they recover only $5,000,000 and keep $4,100,000. That is a HUGE $820,000 difference.


The other downside of average auditors is that roughly 9% of their audits are rejected vs just 6% by top auditors. This can create mistrust and wasted resources between Payer and Provider; commonly referred to as “abrasion”.


These problems are largely hidden because variability in what can be recovered is so great and is so dependent on many outside factors. Apples to apples comparisons are rarely available to Payer decision makers. This has allowed auditing firms to seek out lower and lower cost auditor labor even though it is not in the best interest of the Payers.


Solution


Data is key to understanding what percentage of your claims are being audited by a high-quality auditor or one of lesser ability and experience. There are two data sets we believe are most relevant. Individual auditor data and data that compares two different auditing firms.


First, for Payers of any size your auditing firm should share data on each individual auditor that is auditing your claims, so poor performers are not hidden by the average performance of the group. A single poor performing auditor will cost you many 100,000’s of dollars. Auditing firms should feel pressure to continually improve the quality of their auditors. It is the auditors that will largely determine recovery outcomes and a five-minute review of individual auditor data can drive massive improvements in quality.


Auditor #124

Recoveries per claim viewed $450

Auditor #125

Recoveries per claim viewed $212

Auditor #126

Recoveries per claim viewed $512


Second, if you have the volume to hire two auditing firms and split your audits between the two you can see the relative difference in performance. You can compute lost recoveries by calculating how much more you would have recovered if your better auditing firm had audited all your claims.


Auditing Vendor One

Claim Volume 20,000

Recoveries $3,000,000

Commission Charged = 18%

Cost of Commission = $540,000

Net Recovery = $2,460,000

Provider Abrasion Rate = 6%

True Cost of Using Auditor = 18%


Auditing Vendor Two

Claim Volume 20,000

Recoveries $2,500,000

Commission charged = 18%

Cost of commission = $450,000

Net Recovery = $2,050,000

Provider Abrasion Rate = 9%

Lost Recoveries When Compared to Top Vendor = $410,000 (the 18% commission rate was taking out of the $500,000 in lost recoveries.)

True Cost of Using Auditor = 31.6%


Conclusion


At Data Saints Auditing we not only share the performance of each auditor with our customers but also how much they are being paid. We have worked hard to eliminate a huge portion of the non-auditor costs associated with complex medical bill auditing and use that margin saving to only hire the best auditors. Our processes allow us to not only charge the lowest prices but also provide the best auditors in a 100% transparent model.


Please call me at 650-392-5958 or email me at aknox@datasaints.com to talk more.

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