One Dozen Essential Medical Practice Financial Management Ratios

Transcription

1 ADVISORY PUBLICATIONS One Dozen Essential Medical Practice Financial Management Ratios An electronic report t from Advisor dvisory y Publications Table of Contents The 12 Ratios...2 Benchmarking Against National Averages... 4 NAHC National A/R Statistics by Specialty... 5 How Well Does Your A/R Process Work?...5 Sample Aged Receivables Report (ARR)... 7 Strengthen Your Collection Process... 8 Benchmark Your Overhead and Profit, too... 9 How Did You Compare to Your Peers?... 9 This publication is designed to provide accurate and authoritative information on the subject covered. It is sold with the understanding that the publisher is not engaged in rendering legal service. If legal advice is required, the services of a competent professional should be sought. Advisory Publications, 2003.

2 Even though information alone doesn t do any thing, it provides the primary tools for monitoring your practice s performance and diagnosing problems that impair your productivity. So this report will examine ways to identify problems and come up with solutions that can improve practice revenue. Before we explore the amounts due you your accounts receivable (A/R) remember the old business adage, You can t manage what you can t measure. You can t make changes and improve performance until you have accurate, relevant measures to analyze. Running your business without them is like driving at night with the dashboard lights off you might arrive at your goal safely but, then again, you might go over a cliff. The twelve common management ratios that follow can along with your trusty profit and loss statement form the basis of a practice report card. As we continue to hammer home, brief, regular reporting helps physicians and their administrators/ managers develop a fuller understanding of what s happening in one of the practice s most critical arenas. These ratios, supplied by practice finance specialist Max Reiboldt, routinely turn up in industry benchmark data. We reproduce each formula with a brief description of how it might prove useful to your practice. 1. Gross collections ratio. This basic ratio simply shows how much of what you bill for you actually receive. By itself, it tells little; but compare it with the net collection ratio below to help determine whether your fees are too high (or low). Total collections Total gross charges The 12 Ratios 2. Net collection ratio. Due to contractual adjustments, you are undoubtedly collecting less than ever of what you charge making it more important than ever to actually collect all of what you are legally entitled to receive. This measure incorporates your contractual disallowances, telling how much of what you ve agreed to be paid you actually receive. Be careful here: While your business system presumably allows you to post the disallowances reported with each third-party payor s reimbursement, don t simply assume that whatever is not paid is a disallowance. MCOs and other payors (including Medicare and the Blues) are notorious for disallowing more than they should. Be sure your staff knows your payment rights well enough to post only acknowledged disallowances and to dispute all others. Total collections Total gross charges 3. Overhead ratio. All business owners want to know how much of the revenue it takes to keep their doors open. Most practice and national benchmark measures uniformly exclude physician compensation from the expense ratio calculation. But that consistency disappears when discussing nonphysician practitioners. Some organizations consider nurse midwives, physician assistants and similar clinical extenders as support staff and include them with practice overhead. Others exclude non-physician practitioner salaries from the overhead calculation because they re providers (of direct healthcare services). 2

3 We prefer viewing non-physician practitioners as employee staff who free physicians for greater productivity. Following that logic, include their salaries in the overhead calculation. Whichever way you choose, make sure you calculate your practice ratio according to the same method used by any benchmark. Doing so permits a direct comparison of your data to the national statistics. Total operating expenses (minus provider salaries and benefits) Total collections 4. Individual category expense ratio. Lumping all expenses together often camouflages where a practice overspends. This ratio isolates how much you spend on individual expenses. You must fully understand the impact of such individual expenses as personnel, office facilities and lab and clinical supplies. Individual expense (by category) Total collections 5. Average (adjusted) revenue per day. Comparing this ratio to your daily charges shows you if each day s work at least in terms of revenue production is above or below average. In effect, it shows how busy you are. Many factors, including surgery schedules and the number of physicians working a day s sessions, greatly affect daily charges. Investigate the reasons behind any significant variance. If your adjusted charges per day increases by more than inflation over time, it suggests your practice is growing. Adjusted charges for last 3 months Number of business days in last 3 months 6. Days in accounts receivable. Tracking days in A/R helps monitor billing and collections. The greater this number becomes, the longer it takes insurance plans and patients to pay you. You absolutely must find out why that s happening. Outstanding accounts receivable Average adjusted charges per day 7. Accounts receivable per FTE physician. This ratio calculates an average amount owed for each physician s work. Totaling the receivables for each doctor and comparing that amount with the group s average may expose poor coding skills or a lackadaisical effort at keeping up with paperwork: Dirty and/or tardy claims will virtually always take longer to process than do clean ones. Outstanding accounts receivable Number FTE physicians in practice 8. Staff ratio. Make sure you handle nonphysician practitioners consistently when calculating this ratio. As mentioned earlier, we prefer considering such physician extenders as employees, making them part of the numerator for this ratio. Total FTE employees Total FTE providers 9. Average revenue per patient. This measure and the following one obviously interrelate. Your target: high revenue per patient combined with low cost per patient. Total monthly collections Total monthly patient visits 3

4 10. Average cost per patient. As with all expense ratios, make sure you consistently handle how you account for physician and non-physician practitioners. Total expenses per month Total monthly patient visits 11. Laboratory expense ratio. If you incorporate laboratory or other ancillary services into your practice, track whether such ancillaries continue to prove worthwhile. Use a similar ratio for all add-on services. Total monthly lab expense Monthly net charges for lab-related CPT codes 12. Payor mix ratios. Not all insurers are of equal value to your practice. Calculating this ratio for each contract shows how the individual plan or company contributes to your overall financial success. If one or two companies dominate this statistic, make sure you develop the best possible working relationship with them. At the other end of the spectrum, decide whether you want to put up with a particularly hard-to-work-with plan if you don t generate much revenue from it. You could also calculate similar payor ratios replacing receipts with adjusted charges. That ratio would tell what you should receive from various payors. If what you actually collect differs greatly from what you should collect, investigate problems with your collection activity and/or the payor. Individual payor receipts Total receipts The value of comparing your A/R and collection percentages performance to national averages is that doing so gives you a sense of what is truly achievable. When comparing data, managers and advisors routinely zero in on A/R over a period of months as a handy way to measure a practice s progress and to compare one practice with another. One good source of national data: the National Association of Healthcare Consultants (NAHC) annual statistical report, Survey of Medical and Dental Income and Expense Averages. Benchmarking Against National Averages The information comes from data submitted by members of the NAHC and the cooperating Society of Medical-Dental Management Consultants. These consultants tabulate the figures directly from their medical practice clients annual accounting reports. The table on the next page reports the average number of months charges in A/R for the 34 most representative specialties, using data gathered through the year 2001 (2002 figures won t be available until well into the year 2003, of course). The entire report encompasses highly-detailed data from 56 medical and dental specialties, including breakdowns by geographic region and solo or group operations. (You can order the full report online at 4 or it costs $500 for members and $1,500 for non-members.) NAHC s report is particularly valuable because the organization draws information from small and midsized practices that are typically above average in financial and professional success. Those practices see fit to hire good consultants on a continuing basis. They rely on regular outside advice, including experts who help them conduct the kind of analyses we describe in this book and then help implement changes necessary to continually improve practice performance. We re sure you will want to compare your practice s figure with the most current data in our table to see how you are faring. But be sure to recognize how the

5 NAHC National A/R Statistics by Specialty (Monthly charges in accounts receivable) Allergy/Immunology (147) Anesthesiology (226) Anesthesiology/CRNA (22) Cardiology Invasive ( Cardiology Non-invasive (17) Dermatology (157) Emergency Medicine (139) Endocrinology (13) Family Practice with obstetrics (204) Family Practice w/o obstetrics (397) Gastroenterology (155) Internal Medicine (373) General Surgery (251) Gynecology w/o OB ( Hematology/Oncology (60) Infectious Disease (18) Nephrology (41) Neurology (104) Neurosurgery (42) Ob/Gyn ( Ophthalmology Dispensing (132) Ophthalmology Non-dispensing (111) Orthopedics (322) ENT (101) Pathology (44) Pediatrics (375) Physician Medicine & Rehab (36) Plastic Surgery (69) Pulmonology (56) Radiology (248) Rheumatology (17) Vascular Surgery (12) Thoracic Surgery (18) Urology (176) (The figures in the parentheses are the number of physicians of that specialty included in the survey.) figure was calculated so you ll be comparing apples to apples. Determine where you stand The table shows the A/R dollars in relation to number of months gross charges. Practices commonly use gross charges (before any write-downs) to determine this ratio, and so do the Association statistics. Our table reports this dollar amount as each specialty s mean; thus, half of the practices reporting had amounts greater than the mean figure and half had amounts less than that. To determine your practice s figure, divide your outstanding A/R by the total of the last 12 complete months charges, then multiply that result by 12. It bears repeating that if your figure is considerably higher than the reported mean, it suggests that your staff is not turning over receivables quickly enough. Perhaps they are leaving old receivables on the books too long before seeking payment, referring them to an agency or writing them off. The best way to turn them over, of course, is to collect them in a process that systematically contacts both third parties and patients to pay what they owe as soon as those amounts become known. How Well Does Your A/R Process Work? To start your own financial analysis, use your computerized billing system s A/R reports to find out if collectible balances are growing or shrinking, and how long it takes (on average) to get paid. Chart at least a year s worth of ending A/R amounts from your monthly closing financial reports and note whether the overall total is climbing, descending or generally staying level. 5 Climbing A/R often indicates staff not keeping current collecting and writing off account balances. Dig deeper to find out what s going on: Are you generating more revenue? Did you recently increase your fees? Did you add a new provider? Have you lost a key staffer? Descending A/R shows the opposite: Has patient volume dropped off? Have staff been catching up on

6 old accounts? Comparing your practice s days in A/R number to national or regional averages, or against top performers in your specialty, helps pinpoint where you stand competitively. But the most useful comparison is against yourself: Continue to monitor days in A/R monthly so you can track trends. Remember: Lower is better for cash flow, so if your number seems high or shows an upward trend, dig deeper to isolate the cause. Key questions As the A/R reports generated by your billing system reveal so much about your practice s financial performance, good collections depend on carefully overseeing your accounts status. So develop an ongoing process that includes analyzing them afresh; ask these six questions about your receivables every month: (1) Is your A/R total in the normal range of less than three months total charges? Total charges means accumulated gross charges, and total receivables means as put on the books before reducing for contractual disallowances. (2) Are your aged accounts (again, gross) by payor class consistent? For instance, if 20% of your A/R are usually due from Blue Cross and the figure rises to 35%, be sure to investigate why it changed so much so quickly. (3) Is your adjustment ratio for contractual disallowances stable? If your contracts generally pay 75% of your gross charges, expect adjustments to be in the 25% range; if they go up to 35% in a particular month, find out why. (4) Is your adjusted collection ratio between 90% and 95%? Determine this figure by dividing net charges (after contractual write-offs) by gross charges for the same period. (5) Is your aged receivable 120-day figure less than 20% of your total accounts receivable? By asking this question, you evaluate the billing department s performance in managing your older accounts, an important source of income if pursued properly. 6 (6) Are your aged receivables distributed relatively equally among the physicians in your group? If not, investigate whether any of your members are undermining the collection process. A no reply to any of the preceding questions is cause for concern. It behooves you to find out why and possibly take immediate action. If there s a problem, find out if it s at your end (internal) or at the insurer s end (external). Identifying trends For example, a change in your receivables by payor class may indicate that a certain insurer has not received your claims or that internal problems are causing it to delay payment. Internal problems can range from not obtaining adequate billing information up front to ineffective collection controls. Claims may be backlogged, or perhaps your office is failing to submit clean claims. Perhaps a new staffer is simply making mistakes. Externally, perhaps the payor is experiencing a financial crunch leading to inappropriate denials and adjustments, a slowdown in payments, or both. Or if one physician in your group shows an out-of-norm increase in receivables, see which insurance plans are primarily involved. Perhaps a plan has not recognized your member as a group provider. If so, act promptly to correct the situation. If your over-120 days aged figure totals more than 20%, or your collection ratio amounts to less than 90%, your office s claims processing routines are likely at fault. Or one payor may be mishandling your claims, depressing the ratios. At any rate, clear the matter up to improve your cash flow and reduce the risk of non-payment. Start with the specific ratios described earlier, but go on to develop your own figures reflecting billing personnel performance. Then, from the in-house figures, set benchmarks for improvement with target dates for reaching them. Keep on asking the six questions each month, with ever better ratios demanding yes answers.

7 Tracking key factors over time lets you develop a quality assurance program. You can examine trends and know how they impact the practice, and you ll be better equipped to make wise decisions. Moreover, you can set and monitor standards for your staff s handling of billing and collection functions. That s the way to continually improve your collections performance and ensure that you don t leave any potential revenue on the table. How do your accounts age? Your billing system almost certainly reports A/R by aging buckets to show how much of the outstanding balance is 30, 60, 120 or more days old. Average practices show at least 40% of A/R in the current (<30 days) bucket, with each subsequent month declining as balances are collected and adjusted. If you discover a 120-day balance higher than your 60-day and 90-day balances, the 120-day bucket may contain balances too old to collect. Have your staff clean up old accounts by pursuing the old balances, sending them to a collection agency or writing them off. Continued rising receivables or delays in payment call for increased attention, both to your staff s work and to the payor s situation. Explore the reason for the problem, determine the solution and act quickly. By doing so, staff members know you mean business. Ultimately, their morale will lift as a result of better billing operations and patient satisfaction. Applying your internal data Your computer system probably spits out an aged receivables report each month with monotonous regularity. Even in moderate-sized practices, it runs to ten or more pages of line after line enough to blunt your interest in its data. (And if you still don t run such data on computer, creating the report may seem too overwhelming for what you regard as only slightly useful information.) An aged receivables report (ARR) presents a series of pages listing each open account by patient name and amount owed, with the listings separated according to each account s age those buckets we mentioned earlier on. Current accounts under 30 days old need not be individually listed, but other accounts are carried in 30- to 60-day, 60- to 90-day groupings, and so on. Add up the dollar amounts in each grouping and report each category s total as a percentage of the overall total. The ARR is much more useful than you may think, for it enables you to evaluate collection performance as well as make intelligent decisions about each delinquent account. Our sample below shows a case in point that illustrates how useful such reporting can be if your practice has problems. If, for example, the total dollar amount in the over 120 days category increased from one report to the next, you ought to know why. Similarly, an increase in older receivables is distressing enough to merit special attention. Sample Aged Receivables Report (ARR) Your computer system keeps track of the money each patient and payor owes you. It stores the details in individual patient accounts, but accumulates all those balances and presents them to you in summary form based on their age that is, the time since the date of service. An aged accounts receivable report tells you how much money you have yet to collect for services you rendered this month, last month, and for each preceding month. In most systems, the last aging bucket only tells you that its balances exceed, say, 120 days the actual dates of service usually go back for years. In the example below, this physician s staff collects balances fairly smoothly, as indicated by the declining balances month to month. But notice how balances over 120 days old have grown: Apparently the collection department has allowed old balances to languish uncollected. Current Days Days Days > 120 Days Total Balance: $28, $19, $9, $5, $33, $96, % of A/R: 29.51% 20.07% 9.79% 6.13% 34.50% % 7

8 Strengthen Your Collection Process If your practice is typical, third-party reimbursement for physician services comprises your main source of revenue. Therefore, work to manage the complexities of your overall reimbursement by: Establishing defined billing procedures Analyzing patterns in actual reimbursement Monitoring staff performance How you approach each of these challenges is important to maintaining strong (and steadily improving) collections, so let s consider each. (1) Establish procedures. The first step begins with understanding why you need a process and why it involves the entire staff. Your billing and collection department whether one or two staffers or a more elaborate setup must perform well to insure satisfactory cash flow. That takes teamwork. If everyone does his/her assigned part and supports each other, you ll improve collections and financial performance; reduce billing errors, denials and uncollectibles; streamline administration; elevate staff satisfaction; and improve patient communications and relations. (2) Analyze patterns. With good procedures, you can analyze financial results. When payments arrive, your staff must properly check the claims as filed, examine denied charges and identify what may or may not be legitimate. Insurers make mistakes, so your staff must firmly protect your interest by holding the payor accountable to perform according to contract. Review the insurer s explanations of benefits (EOBs) that accompany your reimbursements, closely examining payments and denials. Monitor the situation by spotting trends in these key areas: Reasons for denials Collection rate by individual carrier Days in collection by payor class Contractual allowances Bad debt write-offs A/R aging by third-party payor Internal billing errors (3) Monitor performance. The third component starts with an awareness of progress or lack of progress. Ongoing monitoring of billing operations detects if the billing department quality has slipped. For example, does it take longer to submit initial claims, or are more claims denied due to error? Meantime, monitoring the performance of payors detects if response time slipped or payment trends change. Line-by-line review So study ARR totals. Compare them to the prior year and to the months before, paying special attention to the percentage of each category to the whole. It s your early warning sign of trends about both patients and insurers payment patterns and it keys you in to how well your staff is performing their collection duties. As a working tool, the report gives your collections employee a specific list for applying his/her followup routines. The employee can select an age category and pursue each listed patient, ideally without interruption, before moving on to the next category. And you can use it to review the accounts individually with collections employees keeping them on their toes in handling them. 8

9 Benchmark Your Overhead and Profit, too It s useful, too, to see how your practice s overhead and profitability stack up against benchmarks. Here s that data from the NAHC/SMD 2002 Report, described Allergy/Immunology (147) $710, % $334,149 from % % Anesthesiology (226) $530, % $338,486 from % % Anesthesiology/CRNA (22) $412, % $313,583 from % -1.30% Cardiology Invasive (116) $910, % $550,160 from % 17.90% Cardiology Non-invasive (28) $736, % $381,670 from % -1.70% Dermatology (157) $779, % $392,500 from % -5.30% Family Practice without obstetrics (397) $380, % $144,779 from % -0.10% Gastroenterology (155) $641, % $387,557 from % 4.30% Internal Medicine (373) $433, % $181,175 from % 1.40% General Surgery (251) $535, % $314,645 from % 16.40% 9 back on page 4 for 20 representative specialties. We consider the NAHC/SMD statistics quite representative of more successful, but smaller, practices. How Did You Compare to Your Peers? Hematology/Oncology (60) $2,277, % $584,690 from % 4.20% Neurology (104) $506, % $235,314 from % % Ob/Gyn (396) $617, % $287,574 from % 6.20% Ophthalmology Dispensing (132) $739, % $311,380 from % 14.80% Ophthalmology Non-dispensing (111) $633, % $276,157 from % % Orthopedics (322) $809, % $438,360 from % 1.40% Otolaryngology (101) $700, % $334,225 from % 14.30% Pediatrics (375) $458, % $185,662 from % 8.50% Radiology (248) $707, % $523,403 from % 4.10% Urology (176) $765, % $430,412 from % 18.90% The data in this chart comes from the 2002 report (on 2001 data) produced by the Joint Statistics Program of the National Association of Healthcare Consultants and the Society of Medical-Dental Consultants. It contains average revenue, overhead ratio and profit (receipts minus non-physician expenses, not W-2 compensation) for selected specialties. The number in parentheses behind each specialty name is the number of practices responding in that specialty.