How To Solve The Mystery Of Declining Accounts Receivable

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).      - 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.

A Primer On Cash Flow

     The cash flow statement is important in a medical practice because it summarizes the affects of cash on operating activities, investing activities and financial activities.      • Operating activities include cash inflows (A/R, receipts, interest and dividends) and outflows (DME inventory and loans). This represents the greatest amount of cash generating activity.      • Investing activities include the disposal or acquisition of non-current assets such as equipment, loans or marketable securities.      • Financial activities generally include the cash inflow/outflow of transactions and other events like issuing capital stock or notes.      As a general rule, an increase in a current asset (other than cash) decreases cash inflow or increases cash outflow. Accordingly, when A/Rs increase, medical service revenues on a cash basis decrease. When DME inventories increase, the cost of goods sold on a cash basis increases, resulting in increased cash outflow. When a prepaid expense like malpractice liability insurance increases, the related operating expense on a cash basis increases. The effect on cash flows is just the opposite for decreases in these other current assets.      Similarly, an increase in a current liability increases cash inflow or decreases cash outflow. Accordingly, when accounts payable (A/P) increase, the cost of goods sold on a cash basis decreases. When an accrued liability such as salaries payable increases, the related operating expense on a cash basis decreases. Decreases in current liabilities have just the opposite effect.

How To Generate Cash In A Crunch

     Since some doctors are still not comfortable with discounted or prospective payment reimbursements, practices are loath to turn away revenue-generating business. Doctors must then devise other methods to generate cash if slow A/R turnover rates produce a cash crunch. Here are methods to consider.      • Extend accounts payable. Discuss any cash flow difficulties with vendors and emphasize their short-term nature. A medical practice still has considerable cache value and vendors may work with you to retain your business.      • Reduce accounts receivable. According to cost surveys, about 31 percent of podiatric medical A/Rs are unpaid at 120 days. In addition, podiatry groups seem to collect only about 69 percent of charges. The rest is bad debt. Therefore, one should aim to keep the A/R that is more than 120 days down to less than 20 to 25 percent of the total practice. Anything over that may just not be affordable.      • Use short-term bridge loans. Obtain a line of credit from your local bank but beware of the time value of money, personal loan guarantees and onerous usury rates.      • Accelerate the cash conversion cycle (CCC). This is defined as the time from the delivery of healthcare products and/or medical services and their respective A/Rs, and ultimate payment. Do not stop paying taxes in favor of cash flow.

Essential Tips On Financial Ratios

     Financial ratios are figures or percentages derived from components of the balance sheet, and represent practice assets and liabilities at a specific point in time. These short- and long-term financial ratios are “benchmarked” to values obtained in surveys that become industry standards. Often they become de facto economic indicators of entity viability and you should monitor them regularly. In fact, many believe that one of the most useful liquidity ratios related to A/R is the current ratio. It is mathematically defined as: current assets / current liabilities.      The current ratio is important since it measures short-term solvency or the daily bill paying ability of the practice. Current assets include cash on hand, cash in checking accounts, money market/deposit accounts, U.S. Treasury bills, inventory, prepaid expenses and the percentage of accounts receivable that you can reasonably expect to collect.      Current liabilities are notes payable within one year. This ratio should be at least 1 or preferably in the range of about 1.2 to 1.8 for medical practices. The quick ratio is similar to the current ratio but money tied up in equipment and DME is not included since rapid conversion to cash might not be possible in a financial emergency. A reasonable quick ratio would be 1.0 to 1.3 for a hospital as this ratio is a more stringent indicator of liquidity than the current ratio. Although there are many other financial ratios, it is important to have an ongoing monitoring system for A/R. It is vital to catch fiscal problems sooner rather than later and watching A/R may be an early sign that you are either eroding or flourishing. A balance that is too low signifies an eroding hospital/practice. A balance that is too high means the hospital/practice is flourishing but the cash flow is poor.

How To Increase Collections And Accelerate The Cash Cycle

     Here are eight specific A/R and CCC acceleration strategies to increase office cash flow and decrease bad debts.      1. Post your office collection policy for co-pays and deductibles. This way, patients know that you require payment at the time of service. It is also a good idea to print policies on your invoice so patients receive a copy with each bill. If your policy states you expect payment before each visit, be sure to collect it so patients know you are serious about account reconciliation.      2. Coordinate benefits. Some patients don’t immediately pay unless you collect the co-pay first. These patients are waiting to see how much their insurance company will pay. While they wait, they are getting billing statements from their medical providers detailing recent submissions. If they do not receive paperwork on a visit, many will assume you have not submitted the insurance claim and will not pay. An easy-to-use billing statement, providing information that can be compared with insurance payments, is a good first step toward meeting patient expectations. Be sure that your account reconciliation reflects what the insurance company indicates for payment.      3. Maintain credentialing files. Patients may be covered by numerous insurance plans and because they have seen you many times, changes in their insurance may not prompt them to notify you that their insurance has changed. However, what if you are not a member of their new insurance plan or your provider status has expired? How will you know? By maintaining credentials and provider status, you will be aware of an expiring or need-for-renewal status. In addition, if your client base continues to add insurance carriers, even for secondary payment, you will have correct information for contracting new insurance carriers to provide services to an even wider range of patients. This can translate into a greater opportunity to expand your practice.      4. Create separate accounts, especially in pediatric cases. Typical divorce judgments include provisions that hold both parents responsible for the medical care bills of children. Try to gain an understanding from both parents so your staff can send bills to the correct parent and insurance carrier. If you continue sending bills to only one parent or the wrong insurance carrier, the parent who gets the bill can quickly find an account that is difficult to decipher and it quickly becomes past due. In the meantime, the other parent only gets information that is filtered through his or her ex-spouse. In these circumstances, the account may already be past due before an opportunity to reconcile is available.      5. Invoice hospital patients daily. Otherwise, do this as soon as you perform a procedure within the global surgical period. Realize that payers are constantly shrinking the claim submission time window, which is now often between 31 days and 24 months. Know your state insurance laws and review all new managed care contracts to eliminate clauses that give payers more time to retain your compensation.      6. Reconcile patient visits with claim submissions every day. You may have actually treated 25 patients in your office but only billed for 24. Audit charts and missing claims. An internal audit control is a good method to identify and reduce mere accidents or detect purposeful fraud. Following a random and individual path of care is another good method to ensure your staff has filed all charges.

How Coding Knowledge And Electronic Claims Can Pay Off

     7. Update ICD-9 codes. Also have the doctor directly provide the procedural code to insurance staff. Know Medicare policy regulations and make sure you have a copy of the most current Medicare Provider Manual (www.HCFA.gov). Read the monthly Medicare News and understand the CMS Correct Coding Initiative. Review all denials, EOBs, vouchers or unpaid professional invoices at least monthly to determine aberrant patterns and trends. A practice may lose up to 25 percent of its revenues through improper coding. Copy both sides of driver’s licenses and insurance cards for coverage verification and personal identification.      8. Use electronic claims. Payments are faster and rejections are noted sooner. Private carriers will eventually require this and major insurance carriers such as Blue Cross/Blue Shield and Medicare encourage e-claim submission since costs are 18 percent to 63 percent less than paper claims.      The American Medical Association (AMA) and the American Dental Association (ADA) report the cost of paper claims processing ranges from $6 to $12 per claim in labor and overhead. This equates to over $300 million per year in potential savings for the healthcare industry. Also consider the following insights from the AMA and ADA.      • Eighty to 90 percent of all healthcare corporate memory exists on paper.      • Of the pages that get handled each day in the average medical office, 90 percent are merely shuffled.      • The average document gets copied 19 times.      • A practice may spend 5 percent of total filing cost on equipment, 20 percent on space and 70 percent on labor.      • A four-drawer file cabinet holds 17,000 pages, costs $25,000 to fill and $2,000 per year to maintain.      • Large healthcare organizations spend $20 in labor to file a document, $120 in labor to find a misfiled document, $220 in labor to reproduce a lost document, and 7.5 percent of all documents get lost completely.      As added encouragement for e-claims, some insurance carriers have mandated that electronic claims be given first priority when it comes to reimbursement. As an example, we have seen it take Medicare about 27 days to review paper claims. Then it takes an additional 14 days to cut a reimbursement check. This totals in excess of 40 days to receive reimbursement for the services that were rendered, assuming the claim was filed correctly.      After all, the AMA also reports that, on average, 33 percent of submitted paper claims contain errors. If there are any problems with the claim, regardless of how minor, the claim is returned to the doctor after the initial review period and the process begins again.      Claims that are submitted electronically to Medicare may not have to go through this 27-day review period. Therefore, reimbursement checks can be cut within seven to 14 days. If there happens to be a problem with the claim, it is returned electronically for correction. Once your staff has corrected the claim, they can resubmit it with almost no delay.      One should also bear in mind that reportedly 15 percent of denied claims are never resubmitted. By filing claims electronically, one can decrease expenses and accelerate and improve cash flow by 20 to 30 days. However, do not send procedural reports or other attachments unless requested.

In Conclusion

     Cash flow analysis with A/R is the comparative norm for all medical office revenue enhancement efforts. Today, having a strong understanding of A/R and accelerating the CCC are essential to facilitating a healthy bottom line for one’s practice.      Dr. Marcinko is a health economist and Managing Principal for www.MedicalBusinessAdvisors.com. He is also the Academic Provost for www.CertifiedMedicalPlanner.com. He can be reached by phone (770-448-0769), fax (775-361-8831) or e-mail: MarcinkoAdvisors @msn.com.      Ms. Hetico is a distinguished visiting instructor in healthcare administration for the University of Phoenix, Graduate School of Business Management, Atlanta campus. She is also the co-editor for the Journal of Healthcare Organizations (Financial Management Strategies), www.HealthCareFinancials.com, and is an educational consultant for www.PodiatryPrep.com.      Editor’s note: For related articles, please visit the archives at www.podiatrytoday.com.

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