There are a lot of reasons why the money collected for a test may not be the same as the expected test volume. A busy laboratory may not be able to identify all the reasons behind the loss of collected revenue and connect them to the orders, systems, and decisions that generated them. The important question to ask is can your staff follow a specific test to its billing outcome? This booklet outlines the control, reports and responsibility that allow staff to follow a specific test to its billing outcome.
Laboratory revenue cycle management
Laboratory revenue cycle management is the connection of the following processes: validation of test orders and test coverage, provision of billable services, timely and accurate submission of claims, reconciliation of payments, management of claim denials, and collection of patient balances. This connection allows laboratories to respond to the need for fiscal accountability in clinical testing. Each service performed should have a documented billing outcome, or an explained nonbillable status or an approved adjustment.
Key take-aways:
- Reconcile completed tests to charges and claims.
- Verify coverage and medical necessity separately.
- Measure denials and acceptances and correct payment differences separately.
- Explain payment differences and automatic write-offs.
- Assign an owner to each exception.
Different laboratory models need different billing controls
Routine clinical testing often produces many smaller claims. Molecular diagnostics can involve fewer, higher-value services with more demanding coverage requirements. Anatomic pathology adds questions about who furnished the professional and technical work.
Hospital laboratories also need to identify whether testing belongs to inpatient, outpatient, or outreach activity. The billing route and payment treatment can differ. A generic claim rule can produce the wrong result when it ignores the setting or billing entity.
| Laboratory service | Control requiring particular attention |
|---|---|
| Routine chemistry and hematology | Panel requirements, units, bundling, and covered indications |
| Molecular and genetic testing | Test identity, coverage criteria, authorization, and required identifiers |
| Anatomic pathology | Specimen documentation and appropriate professional/technical component billing |
| Toxicology | Ordered scope, documented need, and payer limits on testing |
| Hospital outreach | Billing classification, ordering-client information, and low-balance work rules |
Laboratory revenue cycle management should reflect the actual test menu. Grouping every service into the same workflow hides the exceptions that require specialist review.
Understand how the laboratory revenue cycle functions from order to account resolution
1. Validate the Order and Identify the Responsible Parties
Identify patient information, coverage, the ordering practitioner, requested test, and pertinent clinical information. Document which entity performed the service, and which entity has the right to bill for the service.
Develop a process to obtain missing information from ordering offices. Catalog the requests and the unresolved items. Clinical staff need to determine the appropriate next step to take when missing information precludes the test from being performed. Administrative Edits should not make this determination.
CMS states that order documentation should provide sufficient information to determine medical necessity and other elements needed to make a coverage and coding decision. Diagnostic laboratory tests can be ordered in multiple ways. Requiring a signed requisition for every situation can misstate the rule. Use the required documentation for the service rendered and payer.
2. Check Eligibility, Benefits, and Authorization Separately
Eligibility is just one function of the laboratory revenue cycle. Coverage for a particular test may require authorization and/or prior approval for a service. Check the health plan, network, laboratory benefits, and/or coordination of benefits and any test specific approvals.
Authorization may be granted for a service that may include multiple tests. A reference number for the authorization does not, in and of itself, establish that the claim has been approved.
Explicitly assign responsibility to the ordering office for obtaining approval. The laboratory still needs to confirm the approval supports the service for which it is billing. Document and investigate any authorization issues. Authorization does not necessarily guarantee payment.
3. Review medical necessity against the applicable policy
The review of medical necessity in laboratory revenue cycle management starts with the applicable plan. For Medicare, review the relevant National Coverage Determinations, Local Coverage Determinations, and billing instructions.
Identify the policy condition against the clinical indication. A code on the coverage list does not mean every policy condition is satisfied.
If the request is vague, request additional information from the ordering practitioner. It is not appropriate to base a claim on an untested edit. Laboratory revenue cycle management depends on the connection between the clinical request and the service billed.
4. Reconcile performed testing with charge capture
Charge capture in laboratory revenue cycle management connects the accession, ordered test, performed service, result, and billing disposition. Investigate services performed but not charged, and confirm billability before creating the charge.
Take special action for reflex testing, add-on services, order cancellations, orders referrals, and order amendments. An amended result does not warrant another billable service. A canceled order should not be retained in the claim merely because the charge message was transmitted successfully.
Use exception categories, like included in another service, separately billable, nonbillable, or pending further information. This focuses the review of results on exception handling.
5. Apply coding and claim edits to the actual service
CPT and HCPCS codes define reportable services. ICD-10-CM codes define inpatient and outpatient diagnoses. LOINC identifies lab tests and observations, facilitates the exchange of health data, and has been endorsed by several organizations. It does not replace procedural codes for reimbursement. LOINC codes are sometimes ambiguous. One LOINC code may require an edit to identify the specific CPT code.
Review the test method and the applicable code descriptor, and check the units of the test. Panel rules may also impact editing. Verify whether a specific PLA code applies to the proprietary test, where applicable.
Do not use component modifiers for cell types. Component modifiers should only be used to support billing arrangements as specified in the policy. Component modifiers do not apply to repeat tests.
6. Confirm claim acceptance
Verify payer IDs, routing identifiers, and claim fields. Transmitting a file establishes only that a transaction was sent.
Reconcile transmitted claim counts with payer acknowledgments and accepted claims. Rejected claims should be assigned to a correction queue. Claims that are awaiting adjudication should have a different status from claims that have been denied.
Retain evidence of submissions and acknowledgments. This can be helpful in researching a missing claim. It is a basic accountability control for laboratory revenue cycle management.
Implement an exception for a transmitted claim for which there is no confirmation of acknowledgment. Without this control, the billing team may assume the payer is processing an account that was never received.
7. Post payments and explain every difference
Payment reconciliation is a core control of the laboratory revenue cycle. Apply payer payments, adjustments, and patient responsibility as outlined in the remittance or agreed to in the contract. Reconcile posted cash to collections and investigate unapplied cash, credit balances, recoupments, and duplicate payments.
A paid claim can still be underpaid. Check the payer’s payment against its share of the allowed amount accounting for patient responsibility and other adjustments, if any.
A claim example for commercial plans is as follows: The allowed amount is $80, and valid patient responsibility is $12. Given no other adjustments, the expected payment would be $68. The payment is $58 and, thus, $10 is underpaid and requires further investigation. The underpayment should not be misclassified as a contractual adjustment.
8. Resolve insurance and patient balances appropriately
Confirm secondary coverage and patient liability before releasing a statement. Explain your billing, adjustments, payments, and the patient’s balance in terms the patient can understand.
Have a process to address patient questions, disputes, and concerns regarding their financial responsibility. Payment options do not address an inaccurate balance.
For diagnostic laboratory tests paid by Medicare, patient responsibility is generally $0. Therefore, it is important to collection efforts to confirm and verify patient responsibility before applying collection assumptions. Collection efforts should be correlated to verified responsibility.
Denials and overlooked balances: identify the actual failure
Denial analysis in laboratory revenue cycle management separates the payer’s reason from the laboratory’s underlying process failure. “Medical necessity” may describe the adjudication, while the operational cause could be missing records, an inappropriate test selection, or a coverage condition the documentation does not satisfy.
| Problem | Evidence to review | Corrective action |
|---|---|---|
| Coverage or subscriber rejection | Submitted information and coverage response | Correct supported data and confirm acceptance |
| Authorization denial | Approval scope, test, laboratory, and claim details | Resolve the mismatch through the payer’s permitted process |
| Medical-necessity denial | Order, relevant records, and applicable policy | Appeal supported services or document the actual coverage limitation |
| Coding, units, or bundling denial | Performed service, coding instructions, and edits | Correct the claim when justified; avoid unsupported unbundling |
| Duplicate-service finding | Accession and submission history | Identify a duplicate submission or document a distinct service |
| Payment below expectation | Contract, allowed amount, responsibility, and remittance | Investigate the variance and pursue supported recovery |
Give each case a resolution path
Denials are typically preceded by a reason. Record that reason. Determine the claim line the denial is for. Document the amount that can be collected. Identify the necessary documents to resolve the case. Determine who is most likely to resolve the case. Know the requirements for filing or appealing the case. Use the process of correction or reconsideration that is defined by the payer. Repeatedly submitting the same claim does not increase the likelihood of resolution.
Read Claim Adjustment Reason Codes and Remittance Advice Remark Codes and review the payer’s explanation. Neither a code nor an automated label supplies the entire case history.
Protect smaller claims without ignoring work costs
Prioritize by recoverability, filing risk, dollar value, and effort. Large dollar amounts deserve attention, but automatic exclusion of smaller claims may mask actual financial loss in a high-volume laboratory.
For example, 500 unresolved accounts with $8 of supported collectible value each equals a loss of $4,000. Whether recovery is justifiable depends on the effort required. Claims with the same defects may alter the economics of a case.
Evaluate automatic write-off thresholds and approval rules. From a finance perspective, losses should be classified as bad debt, adjustments, or other administrative losses. When unrelated adjustments are grouped together, assessment of the revenue cycle of the laboratory is difficult.
See Where Your Lab’s Revenue Streams Are Undermined
An analysis of requisition, denial, variance, and write-off data can pinpoint where improvements are needed. Establish the scope according to your lab’s testing menu and payer sources.
Close the loop with ordering clients
Track ordering volume in conjunction with billing rework to see if there’s a correlation with tests requested and payment recouped. A helpful scorecard can represent WIP (work-in-progress), missing coverage details, requested documents, and denied claim exceptions. This presents a clearer picture of each office’s performance and helps identify issues that affect related workflows including Medical Credentialing Services.
One office may regularly omit subscriber information and the other may submit test requests that are vague and lack pertinent information. A general office-wide reminder will not fix either of these issues. Share an example with the office, explain what the missing information should be, and what document needs to be completed or corrected.
Laboratory revenue cycle management should also ensure client billing and insurance billing are distinct. Collect the agreed charges and establish a process for resolving client invoicing disputes. Also, take steps to ensure the same service isn’t billed more than once.
Use client reports to confirm test order accuracy. Clinical decisions must remain with the responsible practitioner, and financial reporting should never promote unsubstantiated diagnoses or unnecessary tests.
Measure laboratory revenue cycle management with defined KPIs
Choose operational definitions before comparing performance. A clean-claim figure is difficult to interpret if one report measures acceptance and another measures payment. The definitions below are proposed reporting conventions, not universal industry standards.
| KPI | Calculation or reporting definition | Decision it supports |
|---|---|---|
| First-pass claim acceptance | Original claims accepted without correction ÷ original claims submitted × 100 | Investigate intake, routing, and editing defects |
| Initial denial rate | Claims denied at initial adjudication ÷ claims initially adjudicated × 100 | Identify payer and documentation problems |
| First-pass payment resolution | Eligible claims correctly resolved without rework ÷ eligible adjudicated claims × 100 | Separate technical acceptance from financial success |
| Gross days in AR | Gross open AR ÷ average daily gross charges | Assess unresolved receivables using a consistent charge basis |
| Net collection rate | Net collections for a matched cohort ÷ its collectible amount after contractual adjustments × 100 | Measure collection of legitimately owed amounts |
| Underpayment variance | Expected payer payment minus actual payer payment, after valid adjustments | Identify payment disputes and contract configuration issues |
| Charge-capture completeness | Completed, separately billable services with accounted-for charges ÷ completed, separately billable services × 100 | Expose missing charges and interface defects |
For net collections, align payments and charges to the same population and account for refunds. Removing avoidable write-offs from the denominator can make performance appear stronger without improving recovery.
Keep claim-level and line-level denial rates separate. Also separate count-based rates from dollar-based rates. One expensive molecular claim and many small clinical claims can produce very different conclusions.
Review laboratory revenue cycle management by payer, test group, ordering client, and billing entity. Company-wide averages can hide one poorly performing contract. Set targets from the laboratory’s baseline and comparable definitions rather than adopting an unsupported universal percentage.
Distinguish collections from laboratory profitability
Higher collections can be the result of more testing, a different service mix, or better collection effort. Determine which of these is the case by looking at the associated test case and collection activity.
It is important to manage all aspects of the revenue cycle, from expected reimbursement through collections. This includes integration of the cost of testing, including supplies and labor, as well as referred services, and an appropriate allocation of overhead.
A test may be highly volume, but if allowable payments are low, the test makes little to no financial contribution, and billing adjustments may be required. Another test, with a lower billed charge, may have a higher financial contribution. Gross charges do not always reflect profitability.
This can be helpful in negotiating contracts, investing in new services and technology, and workflow improvement. It can also assist in service planning. It is important to maintain this analysis separate from judgments on an individual patient’s necessary and medically appropriate care.
Technology should expose exceptions and preserve evidence
Technology for laboratory revenue cycle management must track the status of each order and billing activity and document the final outcome. Integrating the LIS and billing systems can minimize duplicate data entry, but the connection must do much more than transmit messages. Determine which system owns order status, test mapping, charge generation, and correction history.
Actions such as coverage checks, required field edits, payer rule checks, acknowledgment reconciliation, payment posting, and work routing can be automated. For services offered by Laboratory Medical Billing, make sure every automated action has an exception path, so that staff can review and adjust records, and document the final action taken.
Set limits on AI assistance
AI can assist in denial pattern recognition, identification of relevant details in supporting documents, and pre-draft correspondence. Staff must review claim details to ensure facts are stated, reference the correct policy and explain the required action.
Staff should not interpret or generate diagnostic or clinical justification codes. Test coding suggestions against actual service performed and the approved code. Keep the source evidence and the decision for review so a dispute can be recreated.
Also assess reporting export and audit logs, and access and recovery procedures and assess interfaces for support. A dashboard is of little value if the team cannot evaluate the underlying accounts or reverse a failed transaction.
Ask the demonstrator to show a failed transaction, how the exception was handled and by whom. That tells you more about the operational support provided than a demonstration of editing passed transactions.
Compliance should be part of the billing process
CLIA Status and Payer Enrollment
In laboratory revenue cycle management, the CLIA checks should connect the performing site with the claim. Ensure the site possesses the appropriate CLIA certificate for the test in question. Verify that required information on the claim is congruent with the site and the service. Other relevant modifiers, as required, should be used to identify waived tests for Medicare recognition. This may depend on the nature of the test and applicable instructions.
CLIA certification, payer enrollment, network participation, and coverage approval are distinct and separate from one another and should not be considered as evidence for the others. Accreditation, if it supports a laboratory’s quality functions, need not fulfil billing obligations.
Fee schedules, coverage and reporting
The Clinical Laboratory Fee Schedule establishes Medicare payment for most of the Clinical Diagnostic Laboratory Tests. Payment for similar tests in other services and settings may be determined differently. Reporting requirements for laboratories under the 21st Century Cures Act (PAMA) is limited to laboratories that CMS has identified as applicable laboratories. Others are not automatically covered.
Molecular Testing
Confirm the requirements of both the MolDX and DEX process for any molecular testing requests. A DEX Z-Code identifies a test and is distinct from a diagnosis code (ICD-10-CM). The laboratory’s Revenue Cycle Management (RCM) should retain the required codes without considering them independent proof of medical necessity.
Patient liability and privacy
An Advance Beneficiary Notice of Noncoverage (ABN) has a specific purpose in Original Medicare. If CMS mandates the completion of an ABN, the notice protects the laboratory from potential financial liability. A general consent form offers no such protection and the process for the Original Medicare ABN should not be assumed for Medicare Advantage.
When a billing vendor handles protected health information as a business associate, a Business Associate Agreement (BAA) should be executed and appropriate safeguards implemented. Determine access permissions for records, subcontractors, and incident response and prevention policies. The laboratory needs to access evidence that supports claims for the process.
Compare in-house, outsourced, and hybrid billing fairly
The best model is the one that addresses a demonstrated operational need. Laboratory revenue cycle management can succeed with an internal team, a specialist partner, or shared responsibilities.
| Model | Where it can fit | Cost and responsibility to examine |
|---|---|---|
| In-house | Experienced staff and strong internal oversight | Staffing, coverage, software, interfaces, training, and supervision |
| Outsourced | A need for additional capacity or specialist execution | Service fees, exclusions, retained tasks, access, and escalation |
| Hybrid | Specific functions need support | Ownership at each handoff and the complete combined cost |
Compare the full internal operating cost with the complete vendor proposal. A collections percentage tells little without its exclusions, treatment of refunds, inherited AR, patient balances, and additional charges.
Define who obtains missing records, corrects order information, authorizes adjustments, and communicates with patients. Purchasing software does not supply the staff to work its exceptions. Outsourcing does not remove the laboratory’s need for oversight.
Select a partner based on your claim-level work sample
Examining laboratory revenue cycle management support requires a claim-level work sample. Ask your prospective partners to describe a small, de-identified sample containing an unbilled accession, a rejection, a medical necessity denial, an underpayment, and a patient balance. Their responses should provide the rationale for the proposed actions, and should refer to appropriate payer instructions, supporting records and policies.
A laboratory revenue cycle management partner should also have:
- Experience with your billing entity, specialty testing, and payer mix.
- Reconciliations of charges and payments and adjustments with open balances.
- Named responsibility for unresolved work and escalation.
- Defined authority to make coding changes or write offs.
- Data exports and necessary security and system access.
Expect process improvements based on your evaluation criteria. A payment increase could be due to an improved payer mix or test volume, for instance. Process improvement in an accountable operating process should be based on supporting evidence and collection data. The best way to improve your process is to train on the actual defect with an example. Focus on the largest demonstrated loss. Define the correction and identify the supporting report that should show the correction was made. Training should be based on the actual defect and an example.
Use this short review checklist
- Are billing dispositions explained for all completed services?
- Can staff retrieve order, policy, authorization, and evidence of submission?
- Are payment variances and credits reflected outside standard cash posting?
- Are write-offs explained and justified?
- Can each KPI reported be determined at account level?
When reviewing exceptions to a policy or procedure, compare the exception to a group of similar exceptions. If the exception is made for write-off justification, it is assumed that collection was not successful, and examine the reason. The process was beneficial if the collection of accounts made the account balances collectible and recoverable.
When staff is able to address exceptions consistently, they will make changes to the financial record that explains the service provided, the amount owed, collection efforts, and the disposition of the account.
How HMS USA Assists Labs in Collecting Revenue
HMS USA provides coding, claim submission, denial management and follow-up on accounts receivable services for laboratories. According to their published service scope, they process claims for various types of testing including, clinical, pathology, toxicology and molecular. An initial assessment of your laboratory’s actual testing services, payer mix and unresolved accounts receivable is a good starting point to consider the utility of their services.
An engagement should answer three basic questions:
Scope: Determine which tasks will be performed by the lab and which by HMS USA.
Accountability: Define responsibility for missing records, management escalations, coding questions and adjustment request approvals.
Visibility: Agree on which reports will link charges, payments, adjustments and outstanding balances.
Consider the complete service proposal and balance the costs to provide the service versus performing the service using an internal or hybrid team. The appropriate course of action is predicated on the need of the laboratory. For example, process claims with a greater emphasis on reporting is a reasonable goal; a guaranteed payment for every test is not.
Develop a Billing System Your Lab Can Track
Have your lab services, payers, and unbalanced accounts reviewed during a laboratory RCM consult. Leverage the results to establish an attainable scope, well-defined roles, and realistic standards.
5. Frequently asked questions
What makes laboratory revenue cycle management different from medical billing?
Laboratory revenue cycle management connects orders, accessions, performed tests, and payer rules across multiple organizations. Panel coding, molecular-test requirements, professional and technical components, and high claim volumes create additional controls. General medical billing also has complexity, but its workflow may not provide the lab-specific reconciliation a testing business needs.
What causes laboratory claim denials?
Causes include eligibility problems, missing authorization, unsupported medical necessity, incomplete orders, coding errors, and billing-rule conflicts. Identify the pattern in the laboratory’s own adjudicated claims. Keep submission rejections separate so the report distinguishes acceptance problems from payer coverage decisions.
Does prior authorization guarantee payment for a laboratory test?
No. Payment can still depend on eligibility, coverage conditions, the actual service, claim accuracy, network status, and the authorization’s scope. Match the approval to the test and performing entity, retain the evidence, and verify the payer’s remaining conditions.
Which KPIs should a laboratory billing manager track?
Track first-pass acceptance, initial denials, correct payment resolution, days in AR, net collections, underpayment variances, and charge-capture completeness. Define each measure and review payer and test-group differences. A high acceptance rate alone does not demonstrate correct reimbursement.
Can laboratory RCM software replace the billing team?
Software for laboratory revenue cycle management can perform configured checks, transmit claims, post payments, and route exceptions. Staff still need to resolve missing information, interpret complex requirements, validate coding decisions, and manage disputes. Evaluate the system together with the people responsible for its unresolved work.
Should a laboratory outsource its revenue cycle management?
Outsourcing can help when capacity or specialist expertise is insufficient. An effective internal team may already meet the laboratory’s needs. Compare complete costs, retained responsibilities, claim-level evidence, reporting access, and transition terms before choosing an internal, outsourced, or hybrid arrangement.
