By Thomas W. Reinke & Timothy C. Hilbert, CPA
Significant differences exist in the billing performance of physician group practices in Pennsylvania and New Jersey. Some practices are struggling to maintain a basic level of billing effectiveness while others have made significant improvements in their billing operations. These improvements are evident in rock bottom accounts receivable, a higher collection ratio and decreased billing errors.
New Physician Billing Benchmarks
One of the historical benchmarks for accounts receivable (A/R) has been the target of 60 days of revenue in A/R. The term, “days of revenue” is based on the average amount of charges per day. If a practice averages $10,000 in charges each day, “60 days of revenue in A/R” equals $600,000 in accounts receivable. This statistic may also be referred to as “Days in A/R,” or “DGRO” = “Days Gross Revenue Outstanding”.
Our work with practices in this region shows that well-run billing departments can do substantially better than this. We have worked with specialty group practices that consistently operate with 35 days of revenue in accounts receivable. These are surgical and other specialist practices operating under fee-for-serve reimbursement without capitation. An A/R of 35 days is significant because specialty practices face some of the toughest billing regulations that may delay payment and drive up their accounts receivable.
Groups that have slashed their A/R frequently see a windfall from collecting cash that was tied up in unpaid accounts. A group that has cash collections of $250,000 per month ($3,000,000 per year) may produce $205,500 by reducing its A/R from 60 days to 35 days.
Efforts to work down A/R often lead to ongoing billing improvements and that means that practices with an A/R at or near the benchmark commonly have a higher overall collection ratio from reduced billing errors such as:
• Pended claims that are never worked.
• Erroneous claims that are not resubmitted.
• Denials for untimely filing.
• Unjustified insurance denials.
• Miscellaneous errors by billing staff.
The collection ratio may be two to three percent higher. While this may not seem like much, in a group with $3,000,000 in annual cash collections a two percent improvement generates $60,000 and a three percent improvement yields $90,000.
A lost claim can cost a specialty practice $500 to $2,000 or more, so the two to three percent improvement may come from collecting a relatively small number (45 to 180) of previously lost claims.
Detailed Accounts Receivable Analysis
Practices with rock bottom A/R have an accounts receivable aging profile that is markedly different from practices with higher accounts receivable. Their A/R differs in two important ways:
• They have significant collections in the 0-30 day aging category, resulting from timely submission of clean claims.
• They have a comparatively low A/R in the 120+ aging category, showing that unresolved claims and self-pay balances do not fall between the cracks.
Following is a detailed discussion of the characteristics of the accounts receivable aging for a physician practice with an accounts receivable of 38 days of revenue.
Accounts Receivable 0-30 Days. In a practice with low A/R approximately 30 percent of a month’s charges are adjudicated within the first 30 days. A group that generates $500,000 per month in charges will have approximately $150,000 of those charges resolved by the end of the first month. This is an important statistic to track because the claims resolved in the first month are an indicator of clean claims and the timeliness of payers.
In Pennsylvania and New Jersey Medicare and the predominant private payers will pay clean claims in less than 30 days. We have seen turnaround times as low as 20 days from the date of service, as measured by comparing the service date to the EOB (remittance advice) date. Therefore, it is reasonable to expect that approximately 30 percent of an average month’s charges will be resolved within the first 30 days.
Accounts Receivable 31-60 Days. In a model practice approximately 84 percent of charges are resolved within the first two months. If a group’s charges are $500,000 per month, the A/R in this aging category should not exceed $80,000.
The accounts receivable in this age range is comprised of claims in process by insurance companies, secondary insurance balances, co-pay and deductible balances and perhaps some claims that have been resubmitted after an initial rejection
A claim that is 31 days old is certainly within normal limits for timely adjudication by an insurance company. But a claim that is 60 days old is becoming overdue. If the amount in this aging category is substantially higher than the benchmark, there are often problems with payers or the claims have errors that cause them to be pended or rejected.
Accounts Receivable 61-90 Days. Over 90 percent of an average month’s charges should be resolved within 90 days. So, following the previous example of a group with $500,000 per month in charges, the total A/R in this aging category should not exceed $50,000.
This category routinely includes self-pay balances or secondary insurance balances, rejected claims not resubmitted by the practice, resubmitted claims being processed by payers, claims pended by insurance companies or those nebulous claims the were billed but “disappeared.”
Generally, accounts in this age range are considered overdue and intensive follow-up should begin at 60 days. Some claims such as workers comp and auto accident may appear in this age range without being considered overdue.
Accounts Receivable 91-120 Days. In a model practice with a benchmark A/R, 93 percent of monthly charges have been resolved within 120 days of the billing date. The A/R should not exceed $35,000 in a group generating monthly charges of $500,000.
The accounts that will appear in this aging category will include some self-pay balances, litigation accounts and problem insurance claim.
The A/R balance and the percent of average monthly charges in this aging category are generally a measure of the extent of the billing errors in the practice. This category shows the frequency of claim errors and the lack of follow-up. The rationale for this assertion is that clean claims and effective follow-up will resolve claims within this time frame.
Accounts Receivable 120+ Days. This aging category is the “catch all” bucket for all unpaid claims or self-pay accounts. The only two non-problem types of accounts that appear in this bucket are litigation accounts and self-pay payment plans. All other accounts in this aging period should be considered problems.
In a high-performing practice the balance in this aging category may range from 22 percent to 28 percent of a month’s charges. In part, this range is derived from a rule that accounts in the 91-120 day aging category should be definitively resolved with 90 additional days of follow-up. Final resolution of accounts should include collection and bad debt write-offs.
With the claims processing turnaround times we are seeing from the major payers in the region, we believe that the benchmark of 35-40 days of revenue in A/R is a reasonable goal for private specialty groups. Furthermore, we believe it is realistic to achieve the following profile for accounts receivable aging:
• The total accounts receivable in the 0-30 day aging category should not exceed 70 percent of monthly charges.
• The A/R in the 31-60 category should not exceed 15 percent of monthly charges.
• The A/R in the 61-90 day category should not exceed 10 percent of charges.
• The A/R in the 91-120 day category should not exceed seven percent of charges.
• The A/R above 121 days should not exceed 25 percent of monthly charges.
These parameters are based upon a true aging from the date a service is billed. Many billing systems will re-age an account or claim if it is transferred from one payer category to another. This is not a true aging, and it skews the aging to younger aging categories.
Exceptions to the Rules
The benchmark A/R of 35-40 days or revenue is not attainable by all practices. Academic practices or hospital-based specialists will usually have more days of revenue in A/R than private practices. The revenue cycle in academic and hospital based practices is more complex with additional billing steps and built-in delays that drive up the A/R. These practices face increased rejections, more erroneous claims and longer turnaround times because of factors such as numerous duplicate patient accounts, slower turnaround times from Medicaid and Medicaid HMOs and difficulty in obtaining accurate referring physician information.
Practices with a high portion of Medicaid or Medicaid HMOs or those with a significant number of workers compensation, injury and legal cases will also have an accounts receivable higher than the benchmark.
On the other side of the benchmark, highly capitated primary care practices often beat the 35-40 day benchmark.
Insurance Contractual Allowances
It is possible to achieve an A/R of 35-40 days of revenue, but the challenge is to do this while simultaneously minimizing write-offs. Write-offs fall into two categories: insurance contractual allowances (C/A) and write-offs taken by the practice.
A variety of errors can occur with insurance contractual allowances and, for some practices, these errors represent the largest amount of lost reimbursement. The most common errors in contractual allowances include writing off rejected services as contractual allowances rather than resubmitting the claim and accepting partial payments from payers and writing off the balance as a contractual allowance.
A specific example of an erroneous contractual allowance involves a service that is denied by an insurance company as “not medically necessary.” A payment posting clerk may interpret this rejection as a contractual allowance when actually it is a claim error that could be corrected. The rejection often stems from a non-specific or inadequate diagnosis, rather than a payer’s benefit limitation. The claim is often reimbursable if an adequate diagnosis is reported. This type of error may go undetected for a long time because both the payment posting clerk and the billing manager may not know all of the diagnosis edits used by each payer.
There is no universal benchmark for contractual allowances. The level of contractual allowances varies by payer, service mix and the practice’s fee level. Each practice should develop its own contractual allowance benchmarks by payer. The payer-specific benchmarks should be derived from a reasonable sample of adjudicated clean claims. It is important not to overlook co-pays and deductibles or other variables such as procedure code that are not covered by a particular payer. Some billing systems facilitate this process with “transaction analysis reports” that show payments and contractual allowances by payer.
In spite of the lack of a universal benchmark for insurance contractual allowances, there is an informal benchmark. The fee schedule in many specialist practices is set based upon Medicare reimbursement or Medicare RVUs. Practice fee schedules for surgical and diagnostic procedures generally range from 150 percent to 300 percent of Medicare reimbursement. In our region HMO and PPO reimbursement is less than Medicare reimbursement for most services, and this has the effect of increasing allowances. Blending the Medicare and private payer contractual allowances yields a “rule of thumb” contractual allowance range of 60 percent to 70 percent of charges.
Once the benchmarks are set, procedures need to be implemented to continuously monitor contractual allowances and write-offs. More importantly, every practice should have procedures to prevent unjustified contractual allowances and write-offs.
Thomas W. Reinke is the manager of Healthcare Advisory Services at Kreischer, Miller & Co., a regional accounting and consulting firm in Horsham, Pennsylvania. Timothy C. Hilbert is a director of Kreischer, Miller & Co.