Accounts Receivable Performance Benchmarking

As a billing service, we are often asked to come into practices that are “bleeding” financially as well as operationally, and to fix and improve on what has become a disastrous situation for the physician owners. Fortunately, we can usually be of help. Unfortunately, there are few quick fixes or “silver bullets” as these situations are caused by extended periods of neglect, mismanagement, lack of resources or all of the above.

Our first approach is to assess the situation, provide damage control to stop the bleeding, and then implement corrective measures including processes, policies and procedures to bring the practice back into a stable financial position. To begin the assessment, we start from what I would best describe is a 30,000-foot view of the practice AR by gathering certain key data and statistics so that we can benchmark using industry standard metrics. The importance of using external data to benchmark against is key, as some problems only become obvious by comparing your practice data against similar practices (size and specialty are two important factors). If your AR is truly a disaster, regardless of why, the 30,000-foot view will almost always provide a map to drill down further into specific problem areas so that you can agree on priorities and begin the process of taking corrective action to fix things.

The purpose of this article is how to avoid this situation through proactive analysis. You can prevent a financial disaster by periodically assessing and benchmarking your accounts receivable. While certain practice experts may have preferences of which reports, statistics, and metrics are most important, I think most would agree that the following list includes the majority of them. For what it’s worth, in addition to the description, formula and purpose of each benchmark, I have included the “Revelance” or ranking, which is my opinion of how you might go about prioritizing. The reasoning here is that while all practices should do all of these benchmarks, many practices do not have the time, ability, or resources to actually do this, so this can give you some idea on where to start if you aren’t doing any of this type of AR analysis currently.

Performance Benchmarks

1. Average Gross Charge [gross charges/units1]
Purpose: Establish a practice’s monthly average charge. This is a highly sensitive index of practice metrics and should vary by small increments (< $1.00) from month-to-month.
Relevance: High

2. Average Net Charge [(gross charges – contractual adjustments)/ units]
Purpose: This is the hypothetical total amount that might be collected from each claim, since contractual write-offs are removed.
Relevance: Moderate

3. Average Payment [payments/units]
Purpose: Establishes a practice’s monthly average payment. Another highly sensitive index of practice metrics that should vary by small increments (< $1.00) from month-to-month.
Relevance: High

4. Average Adjustment [adjustments/units]
Purpose: A highly sensitive index of contractual write-offs; this should vary by less than a dollar, month-to-month.
Relevance: High

5. Collection Ratios
a. Gross Collections [cash/gross charges]
Purpose: Primarily an index of the “altitude” of a practice’s fees. Typically between 45% and 55%.
Relevance: Low
b. Net Collections [cash/(gross charges – adjustments)]
Purpose: Measures what percent of potential collections was actually collected by removing contractual adjustments from base amount.
Relevance: High
c. Adjusted Gross Collections (Does Not Apply to Cash-basis Practices) [(cash + adjustments)/gross charges]
Purpose: This formula counts contractual adjustments as though they were actual cash. This methodology ONLY applies for accrual accounting-based practices; most commonly hospital employed practices.
Relevance: Low

6. Accounts Receivable “Days in A/R”
Step 1. Total gross charges for most recent three months / # of days in those three months = Average Daily Gross Charges
Step 2. Total gross accounts receivable / Average Daily Gross Charges = Days’ Charges in A/R
Purpose: Measures the “turnover rate” of a practice’s A/R, or the average time (in days) it takes to collect a new charge. Three months is used to normalize current activity, as annualized amounts tend to mask near-term pattern changes. This ratio is particularly useful if calculated and monitored by payor.
Relevance: High

7. Average A/R Balance [gross A/R balance / accounts in A/R]
Purpose: When compared to average charge, this amount is another index of the liquidation rate of a practice’s A/R. The closer this amount is to half (or less) of the average gross charge, the better.
Relevance: High

8. Credit Balance Ratio [credit balances / gross charges]
Purpose: Reported as a percentage, this is used to monitor credit balances and unprocessed refunds. This should be less than 1.5% unless there are significant extenuating circumstances.
Relevance: High

9. Bad Debt Ratios [bad debts / gross charges]
Purpose: This ratio should be calculated monthly and year-to-date (using YTD charges and write-offs).
Relevance: Moderate

10. Clean Claim Ratio [# of “clean” claim payments / # of claims submitted]
Note: This is particularly valuable if calculated by payor.
Purpose: This is a measure of the claims paid on first submission without any intervention. It may be calculated using number of claims or claim dollars, although the latter is harder to perform.
Relevance: Moderate

Once you have determined your metrics, you can find the comparative data to measure against through various sources. While the data may not be inexpensive, there are a wide range of services such as CHMB, consultants, or professional organizations that can be of help. One of the most comprehensive sources nationally is the Medical Group Management Association (MGMA), which annually compiles this information by specialty and size of group (based on the number of physicians). California Medical Association and the San Diego County Medical Society are also excellent resources and if they do not have the information you need, they can direct you to resources that can be of assistance.

If you aren’t familiar with any of these metrics, I can only tell you this: You may not like what you find, but best to uncover the problem before it becomes too late to correct or fix. Lastly, our experience has shown that when there is a problem, it is rarely a single factor that caused it and even more rare that a single solution will fix it. Don’t be afraid to reach out and ask for help. There is no shame in asking for a life preserver when you’re drowning.

Note:

1) A unit is a visit, procedure, case, service, item, or product, depending on the client served and the unit to be billed.