How To Solve The Mystery Of Declining Accounts Receivable

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Secrets To Ensuring Proactive A/R Monitoring

Of course, the best way to manage A/R problems is not to let them happen in the first place. Typically, such bad debt control occurs because the doctor is too busy treating patients or the front office staff does not have or follow a formal written system of A/R controls.
Accordingly, here are two useful checklists that one may want to consider for staying on top of A/R accounts.

Internal Accounts Receivable Control Checklist
• Do I check pre-numbered patient encounter forms for on a daily basis?
• Should employees who post payments to A/Rs open invoices or make bank deposit slips?
• Do I reconcile patient sign-in sheets to the appointment book and either the daily report of charges or day sheet?
• Do I review daily payment reports or the day sheet to detect payments that may not have been posted?
• Do I review contractual adjustments to make sure amounts appear reasonable after considering payer mix?
• Do I track patient charge information on EOBs to each ledger sheet and deposit slip and investigate discrepancies?
• Do I review patient ledger cards for written off balances?
• Do I institute and police an account write-off bad debt policy with signature authorization?
• Do I issue a computer password to authorized personnel?
• Are all employees bonded?
• Is an office manger authorized to sign checks?
• Does an A/R manager approve vendor invoices before signing checks?
• Do I regularly review cancelled check endorsements and investigate irregularities?

Accounts Receivable/Bad Debt Expense Control Checklist
• Do written A/R collections guidelines exist for all third-party and self-pay accounts?
• Are A/R collection guidelines reviewed annually and revised periodically?
• Are A/R collection guidelines clearly detailed to serve as a reference to personnel?
• Do employees receive training on collection guidelines?
• Do employees receive training on collection guidelines after revisions?
• Do I solicit suggestions for changes in policies and procedures?
• Do A/R guideline exceptions require approval on a case-by-case basis?
• Do self-pay A/R guidelines allow monthly payments?
• Do self-pay A/R guidelines specify the maximum number of acceptable payments?
• Do self-pay A/R guidelines specify the minimum monthly acceptable payment?
• Do A/R collection guidelines specify actions to take if a patient misses a payment?

How To Solve The Mystery Of Declining Accounts Receivable
When slow A/R turnover rates result in a cash crunch, a practice might aim to accelerate the cash conversion cycle. This cycle is the period of time between delivery of healthcare products and their respective A/Rs, and ultimate payment.
With electronic claims filing, payments are faster and rejections are noted sooner. The authors note that some insurance carriers have assigned a higher priority for reimbursement to electronic claims.
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Author(s): 
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).

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