Understanding Rationale and Formulae
By Dr. David Edward Marcinko; MBA, CMP™
By Dr. Gary L. Bode; CPA, MSA, CMP™
Medical 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
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According 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.
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Conclusion
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Filed under: Accounting, Book Reviews, Financial Planning, Healthcare Finance, Practice Management, Recommended Books, Subscribe CD-ROM Journal | Tagged: accounts payable, accounts receivable, AR aging schedule, ARs, bad debt, bad debt expenses, balance shet, cash equivalents, current assets, current ratio, david marcinko, Gary Bode, income statement, medical billing, medical collections, turnover ratio, www.healthcarefinancials.com, www.healthdictionaryseries.com
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