Healthy physician practice financial formulas

By Michael G. Calahan, PA, MBA

It seems as if financial management of the medical practice should be getting simpler. With the preponderance of electronic tools, various software programs and even the Internet, one can practically “Google” quick assistance and problem-solving. Perhaps in the rush to take advantage of these supportive outlets the most basic of financial formulas – those related to billing and collections – have fallen by the wayside.

Taking a fresh look at the basics of billing and collections is the first step in re-acquainting yourself with financial formulas that indicate how a practice is performing. The fundamental structure of analyzing accounts receivable (“A/R” or the amounts due your practice for services rendered) include knowing the following three financial elements of each patient/payer transaction:

· Charges: full fee amounts for the services provided.

· Adjustments: amounts deducted per contractual obligations, usually with HMOs, PPOs and other payer plan participatory obligations.

· Payments: amounts paid to the practice by patients and payers (receipts).

Collections Ratio

The collections ratio is a percentage that reveals how much your practice is collecting in a defined time period compared to how much it should be collecting during that timeframe. This ratio is directly based on the practice’s charges. There are two basic types of collections ratios: gross collections ratio and net collections ratio. The gross collections ratio, defined as receipts divided by gross (unadjusted) charges, differs from the net collections ratio, defined as receipts divided by adjusted (net) charges. Those adjustments range from payer (insurance plan) participation adjustments the practice is contractually bound to make, to various patient discounts such as charity case adjustments, etc.

Obviously the more useful of the two aforementioned ratios is the net collections ratio. This reveals, following mandated HMO, PPO, other insurance plan adjustments and various patient discounts, exactly what the practice’s adjusted charges amount to; it also provides a more accurate reference point for financial comparisons than the gross collections ratio.

Importantly, in this era of managed care when most actual charges must be adjusted down to net charges, the expected norm for the net collections ratio should be close to 100 percent. Less than 100 percent net collections typically denotes problems such as (1) payer issues: (a) slow payers and/or (b) denied or pended claims by payers; as well as (2) internal practice (operational) issues: (a) slow claim generation times by the practice’s billing staff, (b) unresolved patient portion or patient pay amounts, (c) failure to make mandatory adjustments to patient accounts, and/or (d) poor overall A/R management. Within A/R management, reports generated by the practice’s billing system (see below for more details) should be flexible enough to be created using various parameters, such as net collections year-to-date for all patient types, net collections for only specific traditional payers such as Blue Cross/Blue Shield, net collections for HMOs, net collections for self-pay patients, etc.

Adjustment Ratio

The adjustment ratio is a simple calculation showing how much a practice’s gross charges are being adjusted. Ultimately this reveals how close to realized practice income the original gross charges are, and where the practice’s fee structure is in relation to actual receipts. Factors influencing this ratio include (1) number of HMOs/PPOs and other payer plans mandating contractual adjustments and (2) how high or low the current fee structure is in relation to the majority of payer fee schedules. This calculation can be performed in a number of ways, the simplest being the timeframe’s adjustments (e.g., current month or year-to-date) divided by the gross (unadjusted) charges for the same timeframe.

Remember, again, this figure can be studied in a number of ways to provide different perspectives on the same information. For instance, if the practice has a high adjustment ratio but also has a high patient population of self-pay and/or private insurers (generally paying fee-for-service from gross charges), a practice fee structure revision need not take place. However, if the practice has a high adjustment ratio and only HMO/PPO patients comprising the patient population, a fee schedule analysis might be in order. In the latter, the gross charges may never be fully realized and will result in inflated gross charges and adjustments, with a mountain of adjustment transactions to be done that can actually burden an already busy billing staff.

A/R in Time Ratio

This quick set of calculations reveals how much time, on average, the patient accounts are held in A/R status (versus being paid and resolved). The Months-in-A/R and Days-in-A/R ratios are useful tools that provide a snapshot of the overall A/R standing. For Months-in-A/R, first determine from system-generated reports the A/R for the month under study, e.g., September 2007. Then, for period year-to-date September 2007, add each month’s A/R together and divide by nine for an average of the A/R through and including September. Put these figures into the calculation for the A/R ratio.

For example, $98,000 A/R for Sept 2007, divided by $77,500 Averaged A/R through Sept 2007 equals 1.26 Months-in-A/R. Note that this ratio can be done using gross (unadjusted) A/R or, if the practice makes contractual adjustments during posting of charges (instead of during posting of payments) based on fee schedules preloaded in the billing system, then the Net Months-in-A/R calculation becomes an even more accurate tool. However, even with unadjusted amounts, this ratio still provides a good reference point – using time – for figuring how mature the A/R is on average.

Days-in-A/R follows suit, using the Months-in-A/R final calculation and then multiplying that figure by 30.4 (the average number of days in a given month). In the above example, 1.26 Months-in-A/R is multiplied by 30.4 for a total of 38.3 Days-in-A/R. This number is reflective of the averaged number of days any single claim remains in the A/R, or from another perspective it is reflective of the time it takes any particular claim from start to finish to fully liquidate. Therefore, this particular practice has an average of 1.26 months’ worth or 38.3 days’ worth of A/R awaiting final payment or account resolution.


Detailed reports should be generated on a timely basis each month as well as year-end via the practice billing system. The responsibility for these reports should rest with the billing or office manager. The reports module of the billing system should allow for flexibility in report generation so that both high level reports as well as detailed listings, down to patient account levels, can be demanded of the system. The reports should be produced in a variety of ways but physicians find targeted reports to be most helpful, for example: (1) A/R aging report including current, 30 days, 60 days, 90 days and >120 days age buckets with billing staff notes detailing account work, (2) A/R by insurance type (i.e., by payer including self-pay patients), (3) A/R by suspended, pended or unbilled accounts (this report ensures no accounts remain hidden during the reporting process) and (4) accounts written off to collections (typically those >120 days unless the practice is at fault for untimely filing of claims, etc.). A few other useful and interesting reports are (a) A/R by referring physicians/providers to help spot both lucrative and unhealthy referral sources, (b) A/R by service type, to analyze types of services being rendered as well as A/R attached to those services, and (c) A/R month-to-date and year-to-date as compared with last year’s figures, for year-by-year comparisons of practice growth or other changes.

In conclusion, these fundamental but evergreen calculations can provide quick and useful information when monitoring the health of the practice’s A/R. Used as a management tool, these ratios paint a picture of fluctuations in payer patterns, practice billing operations or other influencing factors. The ratios can also help focus billing and collections efforts in preventing unwanted ballooning of the A/R.

Michael G. Calahan, PA, MBA, is Director, Coding & Compliance, Peak Health Solutions, a Coding and Compliance Consulting Firm based in San Diego, CA.

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