Simplifying accounts receivable can only happen after you know the current status of your accounts receivable. There are a couple of numbers or KPIs you can consider when setting a benchmark to accelerate receipt of payment for services and then improve the processes to support that goal.
Compare the status of your current accounts receivable to national benchmarks by the Medical Group Management Association. This can help determine how extensively this accounts receivable is limiting cash flow. A good accounts receivable process may reduce accounts receivable lag time of more than three months old to below the national MGMA benchmarks. According to data from the MGMA, family practices have a median of 1.19 months in A/R, but general surgeons have a median of 1.52 months in A/R. In other words, setting a goal of receiving payment within two months of providing medical services is a reasonable goal for half of practices in the U.S. But you do need to consider your geographic area as well as your payor mix and type of practice. Those factors could shorten or lengthen days in A/R.
Calculating Days in A/R
To calculate the number of days that claims sit in A/R before being paid (e.g. “days in A/R”), you can take your total accounts receivable and divide that by your monthly charges. Then multiply the resulting number by the number of days in a particular month.
Calculating Accounts Receivable Turnover Ratio
Another KPI is your accounts receivable turnover ratio. You can use this to monitor your rate of debt collection and conversion of A/R into cash in a given accounting period. Divide your net credit sales by your average net accounts receivable (the sum of your net A/R at the beginning of the period and at the end of the period, divided by 2).
Compare this figure with past accounting periods to note if you are maintaining collection rates or if collection is lagging. One rule of thumb is that your accounts receivable should never exceed 1.5 times your monthly charges, but this is just a baseline. Accounts receivable of 0 to 30 days is considered current A/R while anything 30 to 60 days out from the date of service should be the list of accounts worked by your staff or billing company. The billing department should either work on collecting payments or setting up payment plans. However, if you notice Medicare claims showing up in the 30 to 60 day mark, that is a red flag to look at resolving payor denial issues.
According to three years of results from the American Medical Association’s Physician’s Practice Benchmark Survey (2012, 2014, 2016), a post-residency physician today is much more likely to work in a small practice. More than 57% of the 3,500 physicians surveyed in 2016 work for practices with 10 or fewer physicians. Only 13% work in practices with 50 or more. Even more interesting, most physicians work for other physicians rather than for a hospital system. In the last two years, hospital acquisitions of practices have flatlined as those systems work to better manage what they have acquired.
Physicians in small practices today are in a great position to innovate on the standards of patient care, use of technology and practice efficiency. The small practice model may even entice more young people to the medical profession once again as they consider the autonomy and equity from owning a practice. By looking at the fundamental systems that support a productive practice — and the tools and specialists available for your success — your practice can be a critical part of this health care renaissance.
Download the Whitepaper: Tips to Simplify Medical Practice Accounting at Small to Mid-sized Practices
Cornwell Jackson’s Business Services Department offers a wide range of outsourced financial services to serve small to mid-sized medical and dental practices — including payroll outsourcing and solutions to improve cash flow and productivity. While you focus on care outcomes of your patients, we can address the business side of a healthy practice. Contact us for a consultation or click here to view our whitepaper on medical practice KPIs.
Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in auto, healthcare, real estate, transportation, technology, service, retail and manufacturing and distribution.
Contact Scott at email@example.com or 972-202-8000.