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    Dr. Marcinko is originally from Loyola University MD, Temple University in Philadelphia and the Milton S. Hershey Medical Center in PA; as well as Oglethorpe University and Emory University in Georgia, the Atlanta Hospital & Medical Center; Kellogg-Keller Graduate School of Business and Management in Chicago, and the Aachen City University Hospital, Koln-Germany. He became one of the most innovative global thought leaders in medical business entrepreneurship today by leveraging and adding value with strategies to grow revenues and EBITDA while reducing non-essential expenditures and improving dated operational in-efficiencies.

    Professor David Marcinko was a board certified surgical fellow, hospital medical staff President, public and population health advocate, and Chief Executive & Education Officer with more than 425 published papers; 5,150 op-ed pieces and over 135+ domestic / international presentations to his credit; including the top ten [10] biggest drug, DME and pharmaceutical companies and financial services firms in the nation. He is also a best-selling Amazon author with 30 published academic text books in four languages [National Institute of Health, Library of Congress and Library of Medicine].

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The Changing State of Patient Collections

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On the Cash Conversion Cycle for Healthcare Organizations

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Understanding Why Cash Flow is King

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]

The manager, administrator or COO of a hospital’s working capital, or physician executive of a private medical practice, strives to optimize the amount of cash on hand to ensure daily operations. Too much cash generates little return, while too little may jeopardize the healthcare enterprise, incur borrowing costs or cause missed investment opportunities.

Also, the extent to which current assets cover current liabilities, determines whether the entity is considered liquid and thus able to meet its payment obligations on time.

The Balancing Act

When faced with the management balancing act of current assets and current liabilities, the alternative with the highest net present value (NPV) and internal rate of return (IRR) is typically selected. This is often a difficult balancing act since providing healthcare services generates little immediate cash, and then cash receipts are variable depending upon payers or other third parties.

Yet, each hospital or practice distribution transaction requires immediate liquid cash for employees, vendors, debt holders, and investors in the form of dividend payouts or retained earning disbursements. The cash conversion cycle (CCC) length measured in days is composed of two ratios:

  1. The first is the average inventory holding period (ending inventory divided by revenues per day),
  2. The second is the collection period (ending ARs divided by revenue per day). For both ratios, faster is better.

CCC Averages

Sample CCCs for an industry-average hospital (45 days average-non-electronic) are:

1. hospital admission to patient discharge (5 days);

2. patient discharge to hospital bill completion (5 days);

3. hospital bill completion to insurance (third-party administrator or TPA) payor receipt (5 days);

4. receipt by TPA to mailing of hospital payment (25 days);

5. payment mailed to receipt by hospital (3 days); and

6. payment receipt by hospital to bank deposit (2 days).

Assessment

Naturally, healthcare managers, administrators, physicians and hospital executives should be interested in motivating changes in the behavior of staff such that processes within the control of the enterprise can be streamlined and completed in less time.

For example, a day or two reduction in the amount of time it takes from patient discharge to hospital bill completion, as achieved with the use of electronic charts and medical records systems, can significantly increase cash flow. Likewise, the use of electronic funds transfers and/or lock box collection mechanisms can reduce the amount of time it takes for an account receivable to make it into the bank.

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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.

Assessment

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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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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