The coding department of a large physician clinic is interested in purchasing a software program that will edit claims before they are sent out to billing. The license fee for the software costs $34,000 per year. The software is expected to reduce the number of errors on claims and thus reduce the number of claims returned to the clinic for recording. Currently the department codes 24,000 physician visits per month and 250 claims are returned each month for recording. The facility pays two FTEs in the business office $9.50 per hour each to refile the returned claims. The software company promises that its software will reduce the number of returned claims by 90 percent.
a) What is the rate of claims that are currently being returned for recording?
b) How many claims would be returned after the installation of the software?
c) if the clinic eliminated the two FTEs that handle the returned claims, what saving would it realize after installation of the software?
d) what is the payback period?
e) what is the return on investment?
72.44%
a) To determine the rate of claims currently being returned for recording, divide the number of claims returned each month by the total number of claims coded:
Rate of claims returned = (Number of claims returned / Total number of claims coded) * 100
Number of claims returned = 250
Total number of claims coded = 24,000
Rate of claims returned = (250 / 24,000) * 100 = 1.04%
b) To calculate the number of claims that would be returned after the installation of the software, multiply the current number of claims returned by the reduction percentage promised by the software company:
Number of claims returned after installation = Number of claims returned * (1 - Reduction percentage)
Number of claims returned = 250
Reduction percentage = 90%
Number of claims returned after installation = 250 * (1 - 0.9) = 25
c) To calculate the savings realized by eliminating the two FTEs that handle the returned claims, multiply the number of hours per FTE by the hourly rate and by the number of claims returned:
Savings = (Number of FTEs * Number of hours per FTE * Hourly rate) * Number of claims returned
Number of FTEs = 2
Number of hours per FTE = 8 (assuming an 8-hour workday)
Hourly rate = $9.50
Number of claims returned = 25
Savings = (2 * 8 * $9.50) * 25 = $3,800
The clinic would realize a saving of $3,800 after installation of the software.
d) To calculate the payback period, divide the annual software license fee by the annual savings:
Payback period = Annual software license fee / Annual savings
Annual software license fee = $34,000
Annual savings = $3,800
Payback period = $34,000 / $3,800 = 8.95 years (rounded to the nearest whole year)
The payback period is approximately 9 years.
e) To calculate the return on investment (ROI), subtract the annual software license fee from the annual savings and divide the result by the annual software license fee. Then, multiply by 100 to express it as a percentage:
ROI = ((Annual savings - Annual software license fee) / Annual software license fee) * 100
Annual savings = $3,800
Annual software license fee = $34,000
ROI = (($3,800 - $34,000) / $34,000) * 100 = -89.41% (rounded to two decimal places)
The return on investment is approximately -89.41%.
To answer these questions, we need to follow a step-by-step approach:
a) To calculate the rate of claims currently being returned for recording, we need to divide the number of claims returned per month by the total number of claims coded per month and multiply by 100 to get a percentage.
Rate of claims returned = (Number of claims returned / Total number of claims coded) * 100
Given:
Number of claims coded per month = 24,000
Number of claims returned per month = 250
Rate of claims returned = (250 / 24,000) * 100
Rate of claims returned = 1.04%
Therefore, the current rate of claims being returned for recording is 1.04%.
b) The software company promises to reduce the number of returned claims by 90%. So, to calculate the number of claims returned after the installation of the software, we multiply the current number of claims returned by (100 - reduction percentage).
Number of claims returned after installation = Number of claims returned * (100 - reduction percentage)
Given:
Number of claims returned = 250
Reduction percentage = 90%
Number of claims returned after installation = 250 * (100 - 90)
Number of claims returned after installation = 250 * 10
Number of claims returned after installation = 2,500
Therefore, after the installation of the software, there would be 2,500 claims returned.
c) To calculate the savings realized after the installation of the software, we need to find the cost savings from not having to pay the two FTEs who handle the returned claims.
Savings = Cost per hour * Number of hours saved * Number of FTEs * 12 (months)
Given:
Cost per hour = $9.50
Number of hours saved = Number of claims returned * Hours per claim
Number of FTEs = 2
Let's assume it takes 15 minutes (0.25 hours) to handle each returned claim.
Number of hours saved = 2,500 * 0.25 = 625 hours
Savings = $9.50 * 625 * 2 * 12
Savings = $142,500
Therefore, the clinic would realize $142,500 in savings after the installation of the software.
d) The payback period is the length of time it takes for the savings from the investment to cover the initial cost of the software.
Payback period = License fee / Annual savings
Given:
License fee = $34,000
Annual savings = Savings per year (calculated in step (c))
Payback period = $34,000 / $142,500
Payback period ≈ 0.238 or approximately 0.24 years
Therefore, the payback period is approximately 0.24 years.
e) The return on investment (ROI) is a measure of the profitability of an investment, calculated as a percentage.
ROI = (Annual savings - License fee) / License fee * 100
Given:
License fee = $34,000
Annual savings = Savings per year (calculated in step (c))
ROI = ($142,500 - $34,000) / $34,000 * 100
ROI ≈ 319.12% or approximately 319.12
Therefore, the return on investment is approximately 319.12%.