Tackling Difficult Accounts Receivable Problems
Verifying Insurance Eligibility Data
Know and Review your Practice Accounts Receivable
Gross Collection Percentage
Net Collection Percentage
Accounts Receivable Ratio
Percentage of Accounts Receivable over 90 Days
Getting Help with Your Accounts Receivable

The financial performance of your practice revolves around both generating revenue and controlling expenses. In this section, the discussion will focus on how to legitimately produce more revenue, or income, for your practice. In addition to billing, managing your practice's cash flow is also important. Cash flow deals with the available funds the practice has at any point in time to pay its expenses. While cash flow generally follows revenue cycles (that is, the more you bill the more you collect), they are not always identical. Practices, for example, which have a large amount in uncollected accounts receivable usually have a poor cash flow.

In essence, a practice generates income by seeing patients, billing for services and then collecting the money it is owed. While some patients pay for all services themselves, most patients have some form of health insurance. This means that your practice will need to create and submit an insurance claims bill in order to be paid for the majority of your services. This creates a need to develop a good accounts receivable management system to produce bills and keep track of your collections.

Many physicians strive to deliver the greatest level of care by solely focusing on their patients' medical needs. Certainly, taking good care of patients is the hallmark of a good physician. However, the financial management of the practice is also an important key to the long term success of the physician-patient relationship. Physicians who don't understand their personal role in the management of the accounts receivable process will hurt their practices' financial performance. The key point here is that patient health goes hand-in-hand with practice health.

This section of PracticeAdvisor Resource Guide™ details the importance of maintaining an efficient accounts receivable process. It describes the basics of accounts receivable management and its key factors.

With the exception of patient deductibles, co-pays and co-insurance, most physicians do not collect their fees during their patients' visits. Thus, there will always exist a need to bill for services and manage collections through an effective accounts receivable management system. While this might sound like a simple process, it has become one of the more complicated and difficult aspects of managing a practice due to the complexities of today's insurance industry.

Tackling Difficult Accounts Receivable Problems

You don't need to be held hostage to accounts receivable management problems. There are steps you and your staff can take to speed collections up and improve cash flow. Here are a few:

Verifying Insurance Eligibility Data

There are, fortunately, ways to minimize problems related to collections by ensuring that insurance coverage is verified before procedures are performed, that all claims have been properly coded and filed, and that an effective method of tracking these receivables is in place. The best accounts receivable management system will not be able to compel an insurance carrier to pay for an erroneous claim resulting from bad patient eligibility information. This means that you and your staff must get in the habit of always checking patient eligibility each and every time that a patient comes through the door for care. A common practice is to check patient eligibility during the initial visit and assume that the data remains the same forever. Unfortunately, most patients' health insurance coverage is constantly in a state of flux as they change jobs or as their employers modify coverage and switch insurance plans. Checking eligibility and coverage levels only at the time of the initial visit results in a large amount of ineligible claims, resulting in significantly higher practice overhead expense as staff attempts to locate the patient and establish new insurance information. This issue also hurts practice performance by causing poor physician-patient relations over billing matters, a growing backlog of accounts receivable, and dwindling cash flow.

Avoiding the problem is relatively easy - just be sure that your staff check each patient for their current eligibility, as well as gather information about co-payments and deductibles. Some practices perform this function at the time the patient calls to make an appointment. This gives the practice plenty of time for verification. Verification of eligibility and benefits can be achieved either through manually calling the patient's insurance carrier, or through electronic means such as ExpertPractice.com's Receivables Payment Manager™ (RPM) solution. RPM is an application that improves cash flow and reduces billing costs by providing information at time of service which results in an improved collection process.

Automation of the accounts receivable process results in greater efficiency by improving the procedures related to tracking amounts owed to the practice. From closing the monthly books to preparing accounts receivable aging reports, a proper system of managing this process is key to improving your practice's financial performance.

Know and Review your Practice Accounts Receivable

You and your practice administrators should review, at least on a monthly basis, an accounts receivable summary report and a summary accounts receivable aging report. The accounts receivable summary report is designed to give you a snapshot of how much was billed and collected by each type of payer (i.e., Medicare, HMO, PPO, etc.). The aging report shows how much money is outstanding by aging category (i.e., 60 days old, 90 days old, etc.). You should be able to look at these reports and quickly determine whether they make sense or not based upon the volume of patients seen in any given month. The key aim of ExpertPractice.com is to improve your practice's performance by providing simple solutions that can be relied upon month after month. After all, you should be concerned with both your patients' health as well as your practice's health. If you develop these proper habits of reviewing key practice data you will see improved operational efficiency and financial performance.

Using a summary report like the one shown above also allows you to establish trended performance measures for your practice. When comparing the health of your practice against the benchmarks in the ExpertPractice.com database, it is important to minimize the impacts of short-term fluctuations in order to better assess the overall position of the practice. By using a summary report, you or your staff can easily monitor, in detail, several key measures of your practice operation.

In addition to monitoring summary reports of accounts receivable, it is also important for you to review a detailed monthly aging of your accounts receivable. Such a detailed list identifies all patients who owe money to your practice and tells you for how long this money has been owed. This is very similar to the summary aging report except that the information is produced on a patient-specific basis. Financial advisors typically use the term buckets to describe the time-related categories of an aging report. In other words, for each patient who carries a balance, there should be a category which indicates the age of all or part of that balance. Usually, these buckets are categorized in thirty-day intervals. Thus, there would be a category for balances owed which are under 30 days since time of billing, one for between 31 and 60 days, another for 61 through 90 days, one for 91 through 120 days and finally one for amounts overdue by 120 days or more. Many studies have proven that patient balances are more difficult to collect the older they become. Therefore, the goal of your practice should be to take prompt and reasonable action to identify and resolve potential collection problems as early as possible.

As the physician-owner you should develop regular office procedures for preparing and tracking a receivables aging report. Your practice staff should prepare the reports within a short period after the end of each month. While the office administrator can take the lead in preparing these reports, you should be prepared to carefully review the status of delinquent patient accounts, and monitor follow up and collection activities. You and your office staff should work together as a team to promptly collect money owed the practice.

The monthly review of practice data also allows you to develop important trend information about your practice's performance. Accounts receivable management is most effectively tracked through the following four performance indices:

1. Gross collection percentage
2. Net collection percentage
3. Accounts receivable ratio
4. Percentage of accounts receivable over 90 days

Gross Collection Percentage

Unfortunately, the amount received for a service will most likely be less than the original amount charged. HMOs, PPOs and Medicare all have restrictions on payment. Thus, it becomes clear that collections will be less than what your practice's fee schedules would dictate. (Additional information on fee schedules and issues related to billing and coding is available at the Billing and Coding section of PracticeAdvisor Resource Guide™.)

The gross collection percentage indicates what percentage of gross charges are actually paid. It is calculated for a specific period which may be a month, a quarter, semi-annually or annually. It is important that billings and collections are matched for the same period. The formula is as follows:

For example, a practice may bill $100,000 a quarter but only collect $70,000 during the same quarter. This would result in a gross collection percentage of 70%. In this method no attempt is made to adjust the gross billing downward to reflect contractual allowances and other discounts which affect the amount actually collected. The calculation is:

A gross percentage that is too low can indicate a number of problems including an undesirable payer mix, poor billing or collection procedures, unrealistically high fee schedules, or an inappropriately liberal write-off policy. Regardless of the problem, the practice should make changes to its billing policies in order to achieve gross collection percentages that are in line with standards. It should be noted that these standards vary significantly depending on the specialty of the practice.

Net Collection Percentage

Unlike the gross collection percentage method described above, the net collection percentage attempts to anticipate and adjust for expected write-offs and discounts. In this sense, the formula attempts to present a more realistic picture of collections. The formula is:

Let's examine an illustration. For example, while billed charges for the quarter may be $100,000 the practice can expect to collect only $70,000 from third party payers because of HMO, PPO and other payer discounts. However, due to $5,000 of unpaid patient balances and co-pays your net collections for the period are only $65,000. The example calculation is:

In an age of "discounted medicine" many physicians feel that the net collection percentage is a better gauge of how the practice is actually performing. As in the example above dealing with the gross collection percentage, a low percent of collection may indicate serious financial problems within the practice.

Regardless of which yardstick you use, there are steps which your practice can take to improve its collection percentages. For example, instead of billing patients for their co-pay or coinsurance, those amounts should be collected at the time of service. Naturally, understanding the patient's benefit plans is essential to collecting the right amount at the time of service. The practice can devise its own payment policies and decide whether it will accept personal checks or credit cards. However, the use of credit cards is often advisable since it ensures prompt payment of the amount charged. In developing solutions for practice performance, ExpertPractice.com's Receivables Payment Manager™ provides physicians with a cost-effective means of facilitating credit card transactions. RPM not only is a tool for eligibility verification, it also is a point of service terminal for the processing of credit card transactions. It also allows for flexible payment options by allowing you to setup a recurring function, with patient approval, whereby a set amount is credited into the practice account each month. For more information on RPM and its benefits, click here for a brief demo.

Accounts Receivable Ratio

The accounts receivable ratio looks at the current accounts receivable balance in relation to monthly net practice fee-for-service billings based on an average for the last 12 months. The formula is:

Let's take an example to illustrate the calculation. Suppose your current outstanding accounts receivables equal $78,000 and your average monthly gross billings are $33,000. Your accounts receivable ratio would be calculated as follows:

This ratio serves as a quick and easy way to look at recent changes in accounts receivable and will quickly point out cash flow problems related to the practice's accounts receivable policies. Thus, physicians should use this ratio as a quick check of their practice collection systems. It is common for primary care practices to have a ratio of between 1.5 and 2 while surgical specialties and others with heavy concentrations on hospital services run between 2 and 3.

Percentage of Accounts Receivable over 90 Days

Ideally, it should take less than 90 days to collect receivables. The 90-day mark is often used as a critical measure of your practice's ability to manage its accounts receivable backlog. Better performing practices are able to maintain an average of 60 days in accounts receivable. Greatly exceeding the 90 day average exposes the practice to cash flow problems, at which point it would be very important to revise the entire billing and collections process. While it depends on your specialty, a good benchmark is to keep receivables which are more than 90 days to less than 25% of your practice's total receivables.

Getting Help with Your Accounts Receivable

Closely monitoring and tracking each of these accounts receivable key performance indicators greatly empowers the physician to take control of the collections process of the practice. The key issue to consider here is that no practice can succeed solely on just producing bills. There must be a system to effectively collect that revenue and turn it into cash.

ExpertPractice.com is committed to delivering proven resources and expertise to empower physicians with solutions that improve the entire billing and collections procedures of a practice. ExpertPractice.com encourages its members to visit the PracticeAdvisor Resource Guide™ for updates on this topic as well as other practice performance-related issues.