Financial Accounting and Management Reports
To manage a medical practice effectively, whether it be a solo or a group practice, the practitioner and its managers and advisors must have continual access to important financial information. The practice’s finances generally can be summarized by preparing a practice statistical report, a balance sheet, and an income statement on a periodic basis (usually monthly). By using these reports, an accountant, consultant, practice administrator, or physician can evaluate the current financial health of the medical practice.
Numbers and Benchmarking
Medical practice performance can be tied directly to the numbers it produces. Poor statistics usually indicate poor performance somewhere in the practice. This is how you know that there is or could be an existing problem in the medical practice. Good statistics indicate good performance; it is that simple.
Practice Point: Remember this one axiom: NUMBERS DON’T LIE. If a medical practice (or any other healthcare provider for that matter) is not able to meet or achieve certain statistical benchmarks, you can rest assured there is some problem that warrants your investigation. This is why is it so important to monitor financial statistics on an ongoing basis.
Consider the concept of benchmarking - Benchmarking is basically goal-setting, and all medical practices and other healthcare providers need it. For the medical practice, determine where the practice should be in terms of financial statistics and numbers and where it should stand financially day to day, at the end of the month, and at the end of year. For example, should the practice’s overhead be 50 percent of collections? Should only 15 percent of practice receivables be over 90 days old? Should the net collection percentage always exceed 90 percent at any time? Benchmark the medical practice!. By constantly monitoring these benchmarks, you can ensure the ongoing financial success of the medical practice.
Practice Point: It is preferable to monitor financial statistics and benchmarks on a monthly basis because, if a problem is detected, you will want to address it immediately.
Medical Practice Statistical Report
Month Production Collections Gross Coll % Adjustments Adjustment % Net Coll %
Total
Monthly Avg.
Accounts Receivable Balance: $_______________________ (As of _____________)
Accounts Receivable Ratio: ___________________
COMPARATIVE WORKSHEET Month Production- Current Year Production – Prior Year Variance Collections- Current Year Collections- Prior Year Variance Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
You can use the statistical report as a stand-alone report or as a supplemental report to a compiled balance sheet and income statement (i.e the one prepared internally or the one prepared by the practice’s outside accountant). Following is a discussion of the financial figures in the report.
Production
from month to month unless the physician was out of the office for an extended period of time (for example, because of vacation or illness). Production should not fluctuate much for most mature medical practices, especially those that have a consistent volume of clinical services from month to month and from year to year. For new medical practices, the report should indicate that production is growing each month. If not, investigate why immediately.
If production is not consistent from month to month, look for the following possible causes:
The practice fails to bill patients on a timely basis. Work performed in one month should be posted and billed that same month. An inconsistency problem may originate with hospital services. Many offices have difficulty billing hospital visits or surgical procedures on a timely basis. For example, a surgeon performs six surgeries during the third week of the month. She does not dictate the operative note that the office relies on to bill the surgery until the end of the last week of the month. As a result, these surgeries do not get posted and filed until the following month, and cash flow is delayed. In these situations, you may want to consider developing charge tickets the doctor or doctors can use to communicate to billing personnel exactly what they are doing.
The billing personnel lack expertise. Because of their experience and ability, some employees can prepare insurance claim forms more quickly than others. You should review how many insurance claim forms are prepared each day and determine if the number is adequate based on the office’s production patterns. If it is not, determine if it is a people problem or an internal systems problem. Because medical practices are unique, you will have difficulty determining an adequate daily figure for claims preparation. You will need to use subjective judgment to determine if the volume of insurance claim forms prepared daily is adequate or not. For example, if two employees are performing a medical practice’s insurance billing, and one is able to prepare twice as many insurance claim forms per month as the other, the office has a claims filing problem that needs investigation.
can, and often does, decline a service when it must be precertified, or the primary care gatekeeper physician does a more effective job of managing the patient’s condition before the patient is referred to a specialist. Also, competition can reduce production, especially in those situations where a particular group obtained an exclusive managed-care contracting relationship and the related patients of the practice were transferred to this group.
Practice Point: One simple reason for a decline in service volume is that a doctor has not signed up with managed-care plans. If managed care begins to penetrate a service area and the area’s employers begin to contract with these plans for their health insurance needs, doctors will begin to lose patients if they are not credentialed providers on the plans.
Collections
The statistical report also lists collections and the gross collection percentage. Calculate the gross collection percentage (which must not be confused with the net collection percentage) by dividing the practice’s collections by its production.
Monitor and analyze the gross collection percentage on a monthly and year-to-date basis. The gross collection percentage is one of the most important statistics to the practice because it indicates how much of the office’s production is actually going into its bank account. Keep in mind that if the practice can increase its gross collection percentage, its cash flow will increase accordingly. Thus, each month, you should determine if the percentage is reasonable, after taking into account the practice’s special characteristics.
Each medical practice has its own special characteristics that affect the gross collection percentage. Some characteristics have a direct impact on meeting the practice’s benchmark ranges, such as a concentrated fixed-fee environment. For example, this characteristic is the practice’s actual payor mix. Where the practice will fall within these categories will depend on the practice’s payor mix (i.e., the breakdown of revenues between such payors as Medicare, Medicaid, commercial insurance, worker’s compensation, and managed care).
Also, the practice’s fee schedule directly impacts the collection percentages. These percentages assume a fee schedule that is at or near what is usual, customary, and reasonable for a particular service area. If the fee schedule is significantly below, the practice’s actual collection percentage may be artificially high when compared to the benchmarks. For example, if a practice has a high gross collection percentage, and the practice’s revenues mainly come from managed-care patients, the practice fee schedule probably is too low.
cannot be expected to have a gross collection percentage greater than 80 percent in most circumstances because the practice’s Medicare payment profile prohibits it. A practice that has a large number of patients with indemnity coverage, however, could and should expect to have a higher gross collection rate. Primary-care practices, such as pediatrics, often have higher gross collection percentages than do specialty type practices, such as pulmonology.
If the practice’s gross collection percentage does not meet expectations or expected benchmarks, you should look for the following possible causes:
A shift in the practice’s payor mix In some areas, the demographics of patients can suddenly switch from commercial insurance to managed care. Some geographic areas have been known to go from 20 percent managed-care penetration to 70 percent within a 12-month period. Because managed-care plans pay less (the contracted fee is less than the office’s normal indemnity fee schedule), the practice’s gross collection percentage should decline accordingly. Many offices fail to identify when their payor mix is shifting until it is too late to do anything about it. You should remember that people move in and out of health plans throughout the year and that this could directly impact the medical practice.In the following example, a shift in the payor mix has occurred, and the medical office now has more patients with insurance policies that reimburse less than what the practice was getting paid the prior year. This will result in declining revenues for the medical practice.
If a shift occurs, you should first try to pinpoint a breakdown of the practice’s current payor mix, as in the earlier example. You should determine what percentage of the revenue is derived from managed care, commercial insurance, self-paying patients, Medicare, Medicaid, and other insurance programs. Depending on the internal systems of the practice, obtaining this type of information can be an easy task or next to impossible. It may be a difficult task if the practice still uses a pegboard (i.e., manual) type of system. If a practice has a good computer system, you should be able to use it to conduct a payor mix analysis. If the practice does not have a computer, you should ask the physician or the billing staff for best estimates of the payor mix.
Failure to follow up on unpaid insurance claim forms If insurance claim forms are filed and not followed up on a timely basis, insurance companies may delay payment. In turn, the office will not get reimbursed quickly. This is a common systems breakdown in many medical offices and it affects cash flow. The average time it takes a practice to prepare and file insurance claims for hospital services is 17 days from the last date of service.
Failure to collect monies from patients at the time of their office visit For certain medical practices, such as family practice and pediatrics, office collection should be a mandatory policy. If patients do not make payments at the time of their office visit, insurance has to be filed for these services and, consequently, the office must wait for its payment. As a result, the gross collection rate will not be as good as it could have been if these payments were secured at the time of the visit. Thus, if the collection rate declines, the problem could be at the front desk.
Failure to send out patients’ statements on a timely basis Patients who do not receive statements every month cannot pay on their accounts. If the statements are not mailed at the same time each month, cash flow could become erratic.
Change in insurance company reimbursement rates Many insurance plans are changing the way they pay physicians. For example, many commercial insurance carriers and managed-care plans are adopting a resource-based relative value scale (RBRVS) system similar to the current Medicare payment system. There will be continuing pressure to reform the Medicare payment system and this could impact physician reimbursement. Other insurance plans annually decrease reimbursement rates, often without notifying physicians.
Practice Pointer: If collections decline as a result of declining managed care reimbursement, decide whether or not the practice has the ability to renegotiate these rates. If not, you should develop a managed care strategy that will position the practice to accomplish this objective.
Poor patient-receivables management Poor management situations include those in which patients are not called about their overdue accounts, collection letters are not used, or a collection agency is not used properly. A patient may arrive at the physician’s office with an unpaid balance on his or her account. Many offices fail to collect this overdue amount when the patient is in the office. All of these factors could contribute to a poor gross collection percentage.
Possible embezzlement If the practice has a good payor mix, all the right business systems are in place, and the practice’s personnel adhere to those systems, a declining rate could be the result of employee embezzlement. Instead of collected revenue ending up in the practice’s bank account, it is diverted to an employee’s personal account. Contractual Adjustments
The next section of the medical practice statistical report summarizes the office’s contractual adjustments. It also quantifies the related contractual percentage. A contractual adjustment is the difference between what a physician charges and what he or she is legally entitled to receive from the insurance plan. For example, if a surgeon’s normal fee for a procedure is $1,000 and he signs a managed-care contract agreeing to be reimbursed a fee of $800, the contractual adjustment is $200. The contractual percentage is calculated by dividing contractual adjustments by gross production. As with the gross collection rate, you should evaluate the reasonableness of the contractual percentage. When conducting this evaluation, always keep in mind the practice’s current payor mix. This will have a direct impact on the evaluation of this rate. A practice with a high volume of Medicare patients will have a higher contractual percentage than a practice with a high volume of patients who have commercial insurance. For some general and cardiac surgical practices, the contractual rate could be as high as 50 percent. This is simply because the contracted Medicare rates are less— sometimes substantially less. The following are possible causes of an unreasonable contractual percentage:
Using wrong figures You need to know what contractual adjustments include. If wrong figures are included, the contractual adjustment percentage could be artificially inflated. Contractual adjustments include the difference between what a doctor billed and what was approved for payment. The most common category included in contractual adjustments is bad debts. For most medical practices, however, bad debts should not be included because most practices have decided to write off a particular balance as uncollectible. There are two exceptions to this: academic medical centers and non-profit community health centers. Both of these entities are committed to treating the indigent patients. Generally, they represent a significant portion of the entities’ patient base. Therefore, their bad-debt writeoffs will be recurring on a daily and monthly basis. In this type of situation, bad debts might be included in the contractual adjustment category.
A shift in the practice’s payor mix To minimize the cost of healthcare premiums, the employers in the practice area may be purchasing new types of insurance. Normally the switch is to some type of managed-care plan. The shift to such coverage will result in an increase in contractual adjustments. In addition, the patients in the practice’s area may be getting older. Many may be on Medicare, which will also result in contractual adjustments to the practice.
Incorrect posting of payments The office staff may be writing off amounts as contractual adjustments when they should not be doing so. For example, a service is billed to the insurance company, which subsequently denies the charge. Instead of appealing the denial, the staff writes off the service as a contractual adjustment. Amounts due from patients also may accidentally get written off as contractual adjustments. This kind of incorrect posting results from a lack of knowledge of managed-care billing and collection. Sometimes employees believe that if a person has managed-care insurance, he or she does not have to pay anything.
Possible embezzlement To disguise embezzlement, an office employee may write off the full amount of a posted charge as a contractual adjustment while he or she embezzles the full amount. This is easily done in practices that have a high number of contractual adjustments. If a practice is writing off more than half a million dollars in contractuals, most people would not notice an additional $60,000.
Net Collection Percentage
To calculate the net collection percentage, divide the practice’s collections by gross production (production less contractual adjustments).
The net collection percentage indicates how much of the practice’s collectible production is actually being deposited in the bank. As previously mentioned, bad-debt expense is generally not included in this calculation. The net collection percentage should always be more than 90 percent for established medical practices. This is the benchmark. If the practice’s net collection percentage is less than 90 percent, it could be experiencing a rise in its accounts receivable (i.e., the practice is not receiving payment), or the practice might not be writing off contractual adjustments. A net collection percentage of less than 90 percent indicates a problem within the billing and collection process.
Accounts Receivable
From the statistical report, you should look to see if the accounts receivable are getting older. This is called bracket creep. If the accounts are getting older, the office may have a collection problem. The practice may not have a procedure for receivables collection or, if it does, the office staff may not be following it. It could also mean the office is understaffed and may need to hire someone to help with the billing and collection. The following worksheet can be used to analyze accounts receivable and the associated bracket creep.
Month Total A/R Current % 30+ % 60+ % 90+ %
When you review this worksheet, make sure that the accounts receivable are not getting older as the months pass by (i.e. bracket creep). If they are, this will alert him or her to any receivable-related problem that might need immediate attention.
You should also review the aging of the accounts receivable by insurance class. The receivables can be aged by such classifications as Medicare, Medicaid, commercial insurance, and managed care. Most good medical billing software systems should be able to produce such a report. An example of a current aging of the receivables by payor class is shown at the bottom of the worksheet.
The purpose of this review is to determine if the practice is having trouble collecting from a certain payor, such as Medicaid, for instance. This process allows the office to identify a specific collection problem with a specific payor and to take immediate corrective action.
Besides printing an aging-by-payor class, you should see if the computer can produce a similar report by specific payor. Such a report will show you an aging for specific insurance companies, such as Prudential, Blue Cross/Blue Shield, Aetna, Pacificare, and so on. Again, this report allows the office to address a collection problem with a particular insurance company.
A good indicator of how well the office is collecting its accounts is the percentage of receivables that is more than 90 days old. If the percentage is unusually high, something is wrong in the office. Again, a high percentage could be traced to a systems problem, a people problem, or a combination of both. A good benchmark for most medical practices is to keep receivables more than 90 days old at less than 15 to 20 percent of the total amount of accounts receivable. A good specific benchmark would be that no more than 18 percent of the accounts receivable should ever be 90 days or older. Medical practice statistical surveys, such as the one produced by the Medical Group Management Association, could be used for comparison.
One way to manage accounts receivable is to calculate the accounts receivable ratio. Divide accounts receivable by average monthly gross production over the past 12-month period.
The accounts receivable ratio is mainly used as a tool to assess the reasonableness of the current accounts receivable balance. For primary-care medical practices in which revenue is mainly derived from office work, the ratio should be between 1.0 and 2.0. For surgical practices or others with a heavy concentration of hospital services, the ratio should be between 2.0 and 3.0. Under no circumstances should the accounts receivable ratio exceed three times the average monthly gross production. A ratio that exceeds this benchmark indicates a severe collection problem.
In addition to the accounts receivable ratio statistic, there are several other excellent A/R ratios you can and should be using; you should be using them to analyze not only your receivable balance, but the practice’s collection efforts as well:
a) Avg Days Receivable. This statistic is calculated by dividing the A/R balance by daily average charges [YTD Charges/365 days]. You can use 30.41 (365/12 months) in place of 365 days when calculating monthly ratios. You want to keep this figure under 90 days.
b) Accounts Receivable Turnover Rate. This is calculated by dividing the A/R balance by average monthly receipts. This statistic indicates the number of months of work that have not yet been collected yet.
practices) should have between 2.0 and 3.0 of average monthly charges in their accounts receivable balance. Any practice that has over 4 times of average monthly charges in its accounts receivable balance has a collection problem!
Reviewing and analyzing practice receivables on an ongoing basis should be a commonplace occurrence and exercise for ALL medical practices. Unfortunately we have seen quite often that it is not the case. Size of practice does not discriminate here – larger practices can be just as guilty of this offense as smaller ones. If you are a CPA or consultant reader of this newsletter, make sure you and your clients are performing this task on a monthly basis. If you are a reader that works in, or deals with, the management of a medical practice, you too must ensure that proper review and analytical procedures of the accounts receivable are in place and implemented each and every month. In today’s healthcare operating environment and all of its associated management pressures, one cannot ill afford to pay strict and close attention to practice accounts receivables.
Clinical Activities
The statistical report should also summarize the practice’s clinical activities. This includes encounters for office visits, hospital services, procedures, laboratory tests, and X-rays.
