MEDICARE: More Bad News!

By AnneMarie Schieber

A great many physician practices already do not accept Medicare. A recent article in Healthcare News indicates that the trend will only continue.





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CASH FLOW ANALYSIS: Real Life ACO Accounting Example


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What is an ACO?

ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to their Medicare patients. The goal of coordinated care is to ensure that patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors.

When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings it achieves for the Medicare program.


Case Model

Now, suppose that in a new Accountable Care Organization [ACO] contract, a certain medical practice was awarded a new global payment or capitation styled contract that increased revenues by $100,000 for the next fiscal year. The practice had a gross margin of 35% that was not expected to change because of the new business. However, $10,000 was added to medical overhead expenses for another assistant and all Account’s Receivable (AR) are paid at the end of the year, upon completion of the contract.

Cost of Medical Services Provided (COMSP):

The Costs of Medical Services Provided (COMSP) for the ACO business contract represents the amount of money needed to service the patients provided by the contract.  Since gross margin is 35% of revenues, the COMSP is 65% or $65,000.  Adding the extra overhead results in $75,000 of new spending money (cash flow) needed to treat the patients. Therefore, divide the $75,000 total by the number of days the contract extends (one year) and realize the new contract requires about $ 205.50 per day of free cash flows.


Financial cash flow forecasting from operating activities allows a reasonable projection of future cash needs and enables the doctor to err on the side of fiscal prudence. It is an inexact science, by definition, and entails the following assumptions:

  • All income tax, salaries and Accounts Payable (AP) are paid at once.
  • Durable medical equipment inventory and pre-paid advertising remain constant.
  • Gains/losses on sale of equipment and depreciation expenses remain stable.
  • Gross margins remain constant.
  • The office is efficient so major new marginal costs will not be incurred.

Physician Reactions:

Since many physicians are still not entirely comfortable with global reimbursement, fixed payments, capitation or ACO reimbursement contracts; practices may be loath to turn away short-term business in the ACA era.  Physician-executives must then determine other methods to generate the additional cash, which include the following general suggestions:

1. Extend Account’s Payable

Discuss your cash flow difficulties with vendors and emphasize their short-term nature. A doctor and her practice still has considerable cache’ value, especially in local communities, and many vendors are willing to work them to retain their business

2. Reduce Accounts Receivable

According to most cost surveys, about 30% of multi-specialty group’s accounts receivable (ARs) are unpaid at 120 days. In addition, multi-specialty groups are able to collect on only about 69% of charges. The rest was written off as bad debt expenses or as a result of discounted payments from Medicare and other managed care companies. In a study by Wisconsin based Zimmerman and Associates, the percentages of ARs unpaid at more than 90 days is now at an all time high of more than 40%. Therefore, multi-specialty groups should aim to keep the percentage of ARs unpaid for more than 120 days, down to less than 20% of the total practice. The safest place to be for a single specialty physician is probably in the 30-35% range as anything over that is just not affordable.

The slowest paid specialties (ARs greater than 120 days) are: multi-specialty group practices; family practices; cardiology groups; anesthesiology groups; and gastroenterologists, respectively. So work hard to get your money, faster. Factoring, or selling the ARs to a third party for an immediate discounted amount is not usually recommended.

3. Borrow with Short-Term Bridge Loans

Obtain a line of credit from your local bank, credit union or other private sources, if possible in an economically constrained environment. Beware the time value of money, personal loan guarantees, and onerous usury rates. Also, beware that lenders can reduce or eliminate credit lines to a medical practice, often at the most inopportune time.

4. Cut Expenses

While this is often possible, it has to be done without demoralizing the practice’s staff.

5.  Reduce Supply Inventories

If prudently possible; remember things like minimal shipping fees, loss of revenue if you run short, etc.

6. Taxes

Do not stop paying withholding taxes in favor of cash flow because it is illegal.

Hyper-Growth Model:

Now, let us again suppose that the practice has attracted nine more similar medical contracts. If we multiple the above example tenfold, the serious nature of potential cash flow problem becomes apparent. In other words, the practice has increased revenues to one million dollars, with the same 35% margin, 65% COMSP and $100,000 increase in operating overhead expenses.  Using identical mathematical calculations, we determine that $750,000 / 365days equals $2,055.00 per day of needed new free cash flows!  Hence, indiscriminate growth without careful contract evaluation and cash flow analysis is a prescription for potential financial disaster.

ASSESSMENT: Your comments are appreciated.



[Executive Director]




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