Internal Audit: A Hidden Asset for Hospitals in Financially Demanding Times
Nov. 7, 2017
By Anthony Sparacino, CPA, and Rebecca Welker, CIA, FHFMA
Today’s hospitals face tremendous financial challenges and already-stretched budgets that are driving leaders to look for innovative ways to reduce costs and increase revenues. Tapping internal audit’s unique perspective and abilities provides an additional resource in overcoming financial challenges.
By its nature, the internal audit function helps organizations accomplish their goals by using a structured approach to evaluate and improve process effectiveness. Yet management often overlooks internal audit as a solution for identifying revenue enhancement and cost-saving opportunities. While not every audit performed will identify financial benefits, many audits uncover additional dollars or opportunities for cost reduction that organizations can realize. Sometimes, the impact can be in the million-dollar-plus range.
Here are four examples of hospital audits that resulted in significant financial benefit.
Doubling Down on Drug Replacements
Drug replacements are transactions in which a hospital receives free replacement drugs from pharmaceutical companies for treatments provided to patients who cannot pay or whose claims were denied by payers. Denials are especially common in oncology departments when patients receive a form of chemotherapy that is not approved by the Food and Drug Administration for their specific form of cancer. Because chemotherapy medications are very costly, having well-controlled processes in place to apply for drug replacements is essential.
Audit focus: Auditors evaluated a hospital's drug replacement process by looking at three main risk areas:
- Were the hospital’s drug replacement application procedures formalized to promote consistency?
- Did the process include management oversight?
- Was the process designed with sufficient controls in place to minimize the chance of missing replacement drug opportunities?
The findings: The auditors found that a consistent, formal process for drug replacement applications was lacking, and replacement drugs that were obtained were not being documented or tracked. Some replacements were missed because all locations providing oncology services were not included in the drug replacement function. In addition, management oversight of this function was minimal.
The savings opportunity: Following the audit, management addressed all noted concerns and has since obtained approximately $780,000 in replacement drugs over a four-year period.
Boosting Patient Status Performance
Incorrect assignment and incorrect documentation of patient status pose several financial risks for hospitals. Common risks in this area include physician documentation that doesn’t support the patient’s stay in accordance with the two-midnight rule, inpatient stays that don’t meet established clinical criteria, and observation patients who would be better classified as inpatient because of their acute symptoms.
Audit focus: A hospital requested an audit of its care management department’s processes related to assigning patient status (inpatient versus observation) and optimizing length of inpatient stays.
Auditors looked at the following situations:
- Inpatient stays of fewer than two days: Short stays typically do not indicate acute symptoms, making an observation status more appropriate.
- Observation patients with stays longer than three days: Auditors reviewed documentation to determine whether these patients’ symptoms were acute and making them more appropriately classified as inpatients, which would lead to better reimbursement for the hospital.
- Inpatient stays greater than 15 days: Auditors assessed whether patients should have been moved to a more appropriate facility and whether the hospital was incurring more avoidable day costs than necessary.
The findings: Auditors found that anticipated length of stay for patients was not always documented, and patients were not always discharged with the correct status. In addition, patients given inpatient status did not always meet clinical criteria for that status and should have been classified as observation patients. The auditors also discovered that staff members weren’t tracking and recording avoidable days.
The savings opportunity: Excessive stays were found to be costing the hospital $1.5 million annually. By making changes based on the findings following the audit, the hospital was able to realize a large cost savings related to both extended patient lengths of stay and the lack of tracking avoidable patient days.
Gaining Control of Charge Capture
As a best practice, hospital surgery departments should post complete and accurate supply, service, and procedure charges daily. As with other revenue-generating departments, they’re responsible for entering charges daily, correcting errors, and reconciling patient accounting postings to applicable charges.
Audit focus: An audit was performed to better understand and improve a hospital’s business processes, associated risks, and controls to address charge capture risks and identify potential control gaps.
The findings: The auditors discovered that late charge reporting was not regularly produced for the revenue department to monitor, which resulted in a lack of accountability for timely charging. Charge reconciliations also were not being performed in a timely manner, which resulted in missed or suspended charges not being corrected or charged.
The savings opportunity: Instances of missed revenue for supplies and recovery room charges not being captured correctly were costing the hospital $130,000 annually. Missed revenue charges resulting from inaccurate anesthesia care charges amounted to more than $1.6 million in annual revenue opportunity.
Tackling Telemetry Monitoring
Cardiac telemetry is the remote continuous monitoring of patient heart rates and rhythms. Overuse of cardiac telemetry is a common challenge for hospitals, as it poses numerous financial and operational patient safety and patient satisfaction risks, including bottlenecks in patient throughput and loss of patients to competitors when devices are not available when needed.
Audit focus: A health system requested an audit of its cardiac telemetry use after policies and procedures designed to reduce telemetry use were not having the desired impact. Auditors reviewed the following:
- Data and processes – to determine whether they were in accordance with American Heart Association (AHA) guidelines
- Medical records – to determine if they contained appropriate indications of initial telemetry placement and daily assessment of continued need based on AHA guidelines
- Several nursing functions – to look for delays in placement and how long it took to reactivate monitors after they had been removed from patients for procedures
- Telemetry logs – to determine a process was in place to confirm patients were being correctly monitored
The findings: The auditors found that 22 percent of patients who were placed on cardiac telemetry did not meet AHA guidelines for being on telemetry, which was negatively affecting capacity, throughput, and patient transfers. In addition, 49 percent of patient telemetry days did not meet AHA guidelines for continued use of telemetry.
The savings opportunity: Based on audit findings, the auditors identified an opportunity cost savings of as high as $2 million per year for the hospital.
As these examples illustrate, internal auditors have found significant financial benefits in numerous areas across the care continuum. Internal audit and the risk-based methodology it employs is uniquely positioned to work with management to identify revenue and savings opportunities, helping management meet budgeted targets.