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Maximizing return on accounts receivable

By John P. Nealon, CPA

If the focus of your attention to increase your practice’s bottom line is cost cutting, cost cutting and more cost cutting, you most likely are leaving money on the table that would be available for increased physician compensation and don’t even know it.

As investors, physicians are always looking to maximize returns. However, most medical practices spend so much of their efforts watching costs and managing the day-to-day operations of the business they tend to ignore the biggest asset they have: accounts receivable. Practices bill and collect, but do they really study the process to insure every dollar is collected as quickly as possible?

One of the problems facing most practices is that they are heavily staffed in the clinical area because that is where management, usually the physicians, has the greatest comfort level and understands the value the staff provides. When it comes to the billing staff, there are a lot of uncertainties and the services are not as valued because management does not always have a good understanding of the process. Obviously, this is not always true, but is more likely to happen in a small practice. The following paragraphs will help management set up a program to manage accounts receivable and gain a better understanding of that process.

Billing staff should be calculating various statistics each month and summarizing them into a brief report for management’s review. In addition, all practices should be using spreadsheets to analytically review accounts receivable each month by payor and by physician. The key is not always the percentages themselves but the change in percentages month to month that is important.

By calculating and monitoring a few base line statistics, a practice may be able to increase cash collections and collect receivables faster. Increased collections results in increased physician compensation. The longer receivables go uncollected the greater the chance they won’t be collected. Faster collections can also result in increased collections, in addition to better cash flow. Collecting and monitoring a few base line statistics can help catch problems as soon as possible or before they become even greater problems. The faster a practice can correct its billing problems the greater chance it has of collecting its receivables. Statistics can also help management evaluate insurance contracts and physicians’ payor mix. It’s all about properly managing accounts receivable!

For example, one of the most common statistics talked about is net collection percentage. Because there are various types of percentages commonly called “collection percentage,” we will refer to this as Realization Percentage. It represents the net amount collected (realized) divided by the gross charge. Management should calculate its realization percentage, then compare this percentage with industry data. Any variance should be studied to see why the practice is either above or below the industry average.

Let’s assume there is an acceptable variance between the industry average and the practice’s historical statistics. The practice can use its historical percentage as it’s own benchmark and monitor the calculation each month by continuing to calculate the realization percentage on a moving average basis. Should the realization percentage start to drop, the practice can immediately investigate and take corrective action. Had the practice not set it’s own benchmark and paid close attention to the monthly calculations, the problem could take six months to a year before someone noticed there was a problem. In small practices it may be discovered sooner depending on the volume of business, but only by noticing that less cash was being collected. Hopefully, it was not when the accountant sat down to review the annual financial statement and someone started to investigate why collections were down when everyone was working even harder. By the time the problem is uncovered and corrected the chance of collecting the old billings is diminished and the practice has lost the use of the money for the period during which the problem went undetected.

The next step is to prepare a similar spreadsheet but calculate the moving average realization percentage by physician and by payor. This way, management can watch for problems with physicians and payors that might not show up in the aggregate practice percentage, or can help pinpoint where a problem noticed in the global statistic originated.

The formula to calculate a 12-month moving average realization percentage is as follows: (net collections for the month plus net collections for prior 11 months) divided by (gross charges for the month plus gross charges for the prior eleven months).

The billing staff should also calculate and track the average number of days it takes to collect its receivables. The collection period is calculated as follows:(Average Accounts Receivable for 12 months times 365 days) divided by (Billings for the same 12 month Period). The number itself is not necessarily the key, but the change in the number is what management should be concerned with. Anything over 60 days for a practice should be studied for possible problems. It’s best to calculate this percentage by payor so that slow payors can be reviewed. In Pennsylvania clean claims must be paid with in 45 days or medical practices can file a complaint with the state, so it’s important to know this by payor. Is it a slow payor because the practice in not submitting the data properly or is the payor slow? It is important to determine the root causes.

The third indicator that should be reviewed monthly is the collection percentage. This measures the ability to collect what is billed. It is calculated as follows: (Net collections for the month plus net collections for prior 11 months) divided by (Gross charges for the month less contractual adjustments plus Gross Charges for the prior 11 months less contractual adjustments). Contractual adjustments are just that, contractual in nature. They do not include bad debts.

Finally, the last spreadsheet that is recommend takes the data from the accounts receivable aging report and calculates the percentage of receivable in each of aged columns. Most billing systems will produce this report but by putting it into the spreadsheet software and the histories can be maintained for long periods of time. This allows management to watch for trends and catch possible problems that they might not see if their software only produces limited history.

This spreadsheet can also be prepared by payor. It is important that the aging be run by service dates in order for them to be meaningful. Practices should be aware that some billing software refreshes the claims when a partial payment is made—moving the claim to the current column when, in fact, it’s an old claim. This can cause problems with the statistics.

Most personal computers come with the software necessary to create the spreadsheets necessary to calculate these statistics. The practice’s accountant can also help set up the spreadsheet and train the billing staff.

Preparing and analyzing only some of these percentages and analyses may not be enough. Management needs to look at these items as an entire program. Management will uncover problems it may not find if only selected items are reviewed. This program does take time to maintain and monitor, but the investment can be well worth it. Remember: increased collections increases physician compensation. Chances are your practice already has the raw data and the software, so why not give it a try?

John P. Nealon CPA, is a principal of Parente Randolph in Scranton, Pa.

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