How To Solve The Mystery Of Declining Accounts Receivable

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By David Edward Marcinko, MBA, CFP, CMP, and Hope Rachel Hetico, RN, MHA, CMP

     Accounts receivable (A/R) represent free cash flow that is the lifeblood of any medical practice. Staying on top of A/R enables a practice to pay the bills, take care of office payroll and satisfy operational obligations. In the reimbursement climate that exists today, it is not unusual for A/R to represent 75 percent of a hospital’s investments in current assets. For podiatrists, it is not unusual for 30 percent or more of all office A/R to be more than 120 days old.      A feature of A/Rs that makes them unique is the settlement for less than billed amounts. These allowances include four categories that are used to restate A/R to expected values that one can realize. These categories include:      • professional or courtesy allowances;      • charity (pro bono) care allowances;      • doubtful (bad debt) account allowances; and      • HMO and MCO contractual and prospective payment allowances.      Specifically, a medical service generates an A/R when it sends a claim to an insurance company or a bill to a patient. One treats A/R as current assets (cash equivalents) on the balance sheet and usually marks down a percentage to reflect historic collectability.      A related concept is the cash conversion cycle (CCC), which is defined as the length of time between the delivery of healthcare products and/or services, and ultimate payment. For example, the hospital industry CCC average is about 45 to 48 days for non-electronic claims. The CCC includes the following steps:      • Hospital admission to patient discharge      • Patient discharge to hospital bill completion      • Hospital bill completion to insurance (TPA) payer receipt      • Third-party payer receipt to mailing of hospital payment      • Payment mailed to receipt by hospital      • Payment receipt by hospital to bank deposit

A Guide To Understanding Balance Sheet Calculations

     The balance sheet represents a snapshot of a medical practice at a specific point in time. It is not the same as the income statement (profit and loss), which shows figures across a period of time. The balance sheet uses this accounting formula: Assets (what a practice owns) = Liabilities (what the practice owes) + Practice Equity (what is left over).      An A/R aging schedule is a periodic report (30, 60, 90, 180 and 360 days) that shows all outstanding A/R identified by patient or payer and month due. The average duration of an A/R is equal to total claims divided by accounts receivable. It is not unusual for doctors to wait six, nine, 12 months or more for payment.      An important measure in the analysis of accounts receivable is the A/R ratio, A/R turnover rate and average days receivables. With this in mind, consider the following formulas.      - A/R Ratio = Current A/R balance / average monthly gross production (suggested between 1 and 3 for hospitals)      - A/R Turnover Rate = A/R balance / average monthly receipts      - Average Days Receivable = A/R balance / daily average charges (suggested < 90 days for medical practices). Other significant measures include:      - Collection Period = A/R / Net patient revenue / 365 days      - Gross Collection Percentage = Clinic collections / clinic production (suggested > 40 to 80 percent for hospitals).      - Net Collection Percentage = Clinic collections / clinic production minus contractual adjustments (suggested > 80 to 90 percent for medical practices).      - Contractual Percentage = Contractual adjustments / gross production (suggested < 40 to 50 percent for hospitals). These formulas all seek to answer two questions. How many days of revenue are tied up in A/R? How long does it take to collect A/R? Often, practices write off older A/R or charge them back as bad debt expenses, and never collect them at all.

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