The Need to Protect Accounts Receivable [ARs]

Understanding Liability and Stewardship Issues

By Dr. David Edward Marcinko; MBA, CMP™

By Dr. Gary L. Bode; MSA, CPA, CMP™

HOFMSAll hospitals, clinics, healthcare entities and doctors are aware that accounts receivable (ARs) represent money that is owed to them, usually by a patient, insurance company, health maintenance organization (HMO), Medicare, Medicaid, or other third party payer. In the reimbursement climate that exists today, it is not unusual for ARs to represent 75% of a hospital’s investments in current assets. ARs are a major source of cash flow, and cash flow is the life-blood of any healthcare entity. It pays bills, meets office payroll, and satisfies operational obligations.

Medical ARS are Different

A feature of ARs in healthcare organizations that differentiates them from ARs in other types of business is that they are often settled for less than the billed amounts. These allowances include four categories that are used to restate ARs to realizable expected values:

  • professional or courtesy allowances;
  • charity (pro bono care) allowances;
  • doubtful account allowances; and
  • HMO and managed care organization (MCO) contractual and prospective payment allowances.

AR Stewardship Issues

Good stewardship of assets requires that one must be concerned not only with significant economic losses due to professional conduct (professional malpractice liability concerns, and issues raised by the Equal Employment Opportunity Commission (EEOC), Office of Civil Rights (OCR), Occupational Safety and Health Administration (OSHA), and so on); but that of physician partner(s) and even the financial failure of contracted private insurers, payers, MCOs, HMOs, etc. ARs are often the biggest asset to protect against creditors or adverse legal judgments. It is not unusual to have ARs in the range of a hundred thousand dollars for a group practice or medical clinic; and in the millions of dollars for a hospital. Yet, since they can easily be attached, ARs are known as exposed assets to creditors.


A judgment creditor pursuing a doctor for a claim may pursue the assets of the clinic, and ARs and cash are the most vulnerable assets. ARs are as good as cash to a creditor, who usually has to do no more than seize them and wait a few months to collect them. If a creditor seizes ARs, the clinic or health entity may be hard pressed to pay its bills as they become due. One must therefore be vigilant to protect AR assets from lawsuit creditors.




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One Response

  1. More on ARs

    In general, ARs in medical practice should be treated as assets that needed to be protected against creditors while making it perform as an real asset that has valuable return such as Life Insurance for the partners or properties.

    Once the AR is tied up with other performing liabilities then it becomes much harder for the creditor to seize the AR when there is a cash flow issue with collecting the AR on time.

    Another effective tool for collecting the AR in a timely fashion is AR factoring which uses a third party collection agency (lender) whom will pay the practice 80-90% of the AR value right a way; and the rest upon final collected amount minus the charges.

    AR factoring and leveraging are great tools for protection against creditors as well as transforming a book-keeping dormant item from the balance sheet into a productive performing asset. However, as a savvy investor, what are the risks involve?

    If the interest rate of the loan against the AR loan spikes, the borrower would have require to pay such amounts or risk loan default. Secondly, a default would foreclose on the available collaterals; subsequently affecting the practice of the business and the owner’s credit rating.

    Nevertheless, the rewards are much greater against the risks in investing the existing ARs.

    Ken Yeung MBA
    Certified Medical Planner™ candidate


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