You can’t manage what you don’t measure. This is so true with many things in everyday life. It’s also true if you’re managing a modern medical practice. Yet too many physicians are unaware of how better reporting can drive higher performance.
Here’s the good news: By understanding three simple metrics, you can be on your way to improving the financial health of your practice and increasing the valuation of what may be your most valuable asset.
1. COLLECTION RATE. This measures a practice’s effectiveness in collecting all legitimate reimbursements. This takes into account the payers who the practice has contracted with and agree to write off the difference between the standard fee and the payer reimbursement rate.
By comparing the difference between allowed amounts and actual reimbursements, a practice can determine how much is lost to write-offs, untimely filing, non-contractual adjustments and inferior collection practices. Gross collection rate is calculated by dividing payments received from insurers and patients by gross charges. The rate can sometimes be misleading, since most medical practices inflate the charges billed to most insurers.
Calculated by dividing payments received from insurers and patients by the allowed/contractual amounts, the net collection rate is often more indicative of the physician’s true collections performance. As an effective benchmark of the practice’s financial health, it represents the percentage of reimbursement actually achieved from the reimbursement allowed, based on contractual obligations with payers.
Practices can also analyze their performance by looking at their net collections by payer. If you see unacceptably low net collections for certain payers, you may want to consider an alternative—like requiring patients to pay up front for services or renegotiating payer contracts.
2. DAYS IN ACCOUNTS RECEIVABLE. This industry standard is used to measure how long it takes to pay off amounts owed to the practice by insurance payers, patients and third parties. If you were to see a patient today, the number of days in A/R represents the average time it takes before you are fully paid for services provided. The industry benchmark is typically 30 days, but that can vary by specialty and payer mix.
Days in A/R is one of the best indicators of revenue cycle performance, and regular monitoring can provide insight into the cycle’s efficiency. Most practice management (PM) applications have a built-in capability to run a report monthly, quarterly, yearly or some other time frame. For practices without this reporting capability, days in A/R can be calculated using the following formula:
(TOTAL RECEIVABLES – CREDIT BALANCE) ÷ AVERAGE DAILY GROSS CHARGES (GROSS CHARGES ÷ NUMBER OF DAYS)
Here’s an example:
- Receivables: $95,000
- Credit balance: $6,000
- Gross charges: $725,000
95,000 – $6,000 = $89,000
$725,000 ÷ 365 days = 1,986
$89,000 ÷ 1,986 = 44.80 days in A/R
NOTE: To appropriately reflect practice performance, it’s important to grasp some of the nuances that could have an impact on results. These include carriers that are slower to pay, recognition of accounts in collections, and claims that have aged past 90 or 120 days. It’s financially prudent to compute this metric with and without these categories so the overall numbers aren’t skewed by factors that may negatively impact finances.
3. ACCOUNTS RECEIVABLE AGING. This type of analysis compares actual A/R aging with expected A/R aging. Disproportionate percentages indicate inconsistencies in the collection process. The chart below shows the ideal A/R percentages:
|Total A/R Percentage||Days|
Over 90 days
Most PM applications can generate an A/R aging report that breaks down claims based on the number of days they’ve gone unpaid, totaled by payer. This helps to identify potential issues so you can prioritize how to best manage A/R follow-up by dollar amount and payer. The overall goal is to properly measure your practice’s ability to quickly turn over accounts receivable and collect all money due.
The bottom line: You can’t know where you’re going until you know where you are. Understanding the importance of your collection rate, days in A/R and A/R aging can open the door to a breadth of helpful information that will put you on the path to higher performance at your practice.