Medical Accounts Receivable and Related Formulae

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Understanding Rationale and Formulae

[By Dr. David Edward Marcinko; MBA, CMP™]

[By Dr. Gary L. Bode; CPA, MSA, CMP™]

HO-JFMS-CD-ROMMedical practices, clinics and hospitals generate a patient account or an account receivable (AR) at the same time as they send the patient a bill or the insurance company a claim. ARs are treated as current assets (cash equivalents) on the healthcare entity balance sheet, and usually with a percentage mark-down to reflect historic collection rates.

The Balance Sheet

The balance sheet is a snapshot of a medical practice or healthcare entity at a specific point in time. This contrasts with the income statement (profit and loss), which shows accounting data across a period of time. The balance sheet uses the accounting formula:

Assets (what the entity owns) = Liabilities (what the entity owes) + Entity Equity (left over).

AR Aging Schedules

HDSAccording to the Dictionary of Health Economics and Finance, an AR aging schedule is a periodic report (30, 60, 90, 180, or 360 days) showing all outstanding ARs identified by patient or payor, and month due. The average duration of an AR is equal to total claims, divided by accounts receivable. Faster is better, of course, but it is not unusual for a hospital to wait six, nine, twelve months, or more for payment. Each of these measures seeks to answer two questions:

1) How many days of revenue are tied up in ARs?

2) How long does it take to collect ARs?

More Formulae

An important measure in the analysis of accounts receivable is the AR Ratio, AR Turnover Rate, and Average Days Receivables, expressed by these formulae:

1. AR Ratio = Current AR Balance / Average Monthly Gross Production
(suggested between 1 and 3 for hospitals)

2. AR Turnover Rate = AR Balance / Average Monthly Receipts

3. Average Days Receivable = AR Balance / Daily Average Charges
(suggested < 90 days for medical practices)

And Even More Measures

Other significant measures include:

1. Collection Period = ARs / Net Patient Revenue / 365 days

2. Gross Collection Percentage = Clinic Collections / Clinic Production
(suggested > 40-80% for hospitals)

3. Net Collection Percentage = Clinic Collections / Clinic Production – (minus) Contractual Adjustments (suggested > 80-90% for medical practices)

4. Contractual Percentage = Contractual adjustments / Gross production
(suggested < 40-50% for hospitals).

Assessment

Often, older ARs are often written off, or charged back as bad debt expenses and never collected at all.

Conclusion

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2 Responses

  1. It is still very difficult for me to send a patient to collections. I do so with utmost care:

    http://theindependenturologist.blogspot.com/2008/12/to-send-to-collections-or-not-that-is.html

    Dr. Gremmel

    Like

  2. More on Medical Practice ARs

    It is important for a physician practice to recognize the 3 different types of medical accounts receivables before considering certain AR techniques to maximize return and maximize collection efforts:

    1) Mainstream ARs such as those due from third-party payors
    2) Nonmainstream AR such as other health care facilities
    3) Not acceptable ARs which are owed by patients directly and includes self-pay and concierge practices

    Physicians should consider the difficulty that honest patients encounter sometimes being mixed up with the AR process, and likewise medical practices should be slow to pull the “collections” trigger. Patients (#3) often wait endlessly for their insurance company (#1) to make a payment so that they can determine their payment. Patients can honestly believe that the copay they paid at the office was their complete obligation, only to discover many months later a demand letter from the practice. Third-party payor status updates of a claim mailed to patients are often difficult for the average patients to understand.

    Of course, deadbeat patients should be sent to collections. The medical practice must first ensure that it has made the necessary communications with the patient however first to correctly access the situation.

    David K. Luke, MIM

    Like

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