As the 21st Century begins to fully set in, so has reality with the state of medical practice revenues. Medical reimbursement has stagnated or decreased substantially in both real dollars as well as after inflation adjustment, making it more difficult for providers to cover their overhead adequately and have much left over. If a medical practice can continue its current patient care volume and medical billing, yet decrease its Accounts Receivable (AR) by 33%, what would that mean for the practice?
Let's look at a sample medical practice called All-City Medical. The practice utilizes an in-house medical biller with concerns over whether collections are being adequately pursued.
All-City had annual gross collections of 1.2 million dollars in 2009.
Their Accounts Receivable at the beginning of the year, 1/1/09 = $250,000 Their Accounts Receivable at the end of the year, 12/31/09 = $350,000 The average AR therefore is 250,000+350,000/2 = $300,000
The accounts receivable turnover rate is calculated as gross collections divided by average AR: 1,200,000/ 300,000 = 4 times. This means that in a full year the accounts receivables are collected and closed 4 times for the practice. How many AR turnover days will it take to complete one cycle of collecting and closing? 365 days/4 times = 91 days for AR to turn over. This means that in 91 days patients receive medical treatment, charges are posted and medical claims are processed through the clearinghouse, and payments are received from either the insurance companies or patient payments, with the receivable accounts closed. How does a medical practice decrease its AR? Once that goal is accomplished, what does that mean? The way to do it is to increase the turnover ratio. If All-City Medical increases the turnover ratio to 6 times, that means it will only take 61 days (365 days/6 times) for the AR to turn over. With this improvement All-City Medical's average AR outstanding decreases from $300,000 to $200,000! 1,200,000 collections/turnover ratio of 6 = $200,000 average outstanding AR The end result is that All-City Medical now has $100,000 more cash on hand to either: 1) Distribute to the Partners 2) Pay Expenses 3) Invest in Capital Equipment to make more money for the practice.
No matter which option the practice decides on, the bottom line is they have freed up hard money for the practice.
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