3 financial metrics to drive better practice performance

“You can’t manage what you don’t measure.”

This is so true in so many things we do in everyday life. But this is especially true if you are a doctor today responsible for the management of a medical practice.

Unfortunately, too many physicians go to work every day unaware of how better reporting can drive higher performance of their medical practice.

The good news is by understanding three simple indices and metrics, any physician can begin to dramatically change the financial outcome of a medical practice and realize the return on investment of their efforts and an increased valuation of what is likely their most valuable asset.

Collection rate

A collection rate is the measure of the practice’s effectiveness in collecting all legitimate reimbursements. This takes into account the payers who the practice has contracted with and agree to write off the difference between the standard fee and the payer reimbursement rate.

By comparing the difference between the allowed amounts and actual reimbursements, a practice can determine how much is being lost to write-offs, untimely filing, non-contractual adjustments, and inferior collection practices.

Gross collection rate is calculated by dividing payments received from insurers and patients by gross charges. The gross collection rate can sometimes be misleading since most medical practices inflate charges billed to most insurers.

Net collection rate is calculated by dividing payments received from insurers and patients by allowed or contractual amounts. This is often more indicative of the physician’s true collections performance. As an effective benchmark of the practice’s financial health, it represents the percentage of reimbursement achieved out of the reimbursement allowed based on contractual obligations with payers.

Medical practices can also analyze their performance by looking at their net collections by payer. If a medical practice sees unacceptably low net collections for a particular payer, it may consider alternatives such as requiring patients to pay up front for services or renegotiating payer contacts.

Days in accounts receivable

Days in accounts receivable (A/R) is an industry standard for measuring how many days amounts owed to the practice by insurance payers, patients, and third parties will take to be paid.

For example, if you see a patient today, days in A/R represent the average number of days it takes before you are fully paid for the services provided. The industry benchmark for this is typically 30 days but can vary by type of specialty and payer mix. This is one of the best single indicators of the performance of the revenue cycle and regular monitoring can provide insight into the efficiency of the revenue cycle.

Most practice management (PM) applications have built in capability to run a report for the desired timeframe, namely monthly, quarterly or yearly. If the PM application does not have the reporting capability, days in A/R can be calculated using the following formula:

(Total receivables – credit balance)/Average daily gross charges (Gross charges/#days)

  • For example:
    • Receivables=$80,000
    • Credit balance-$5,000
    • Gross charges= $600,000
    • [80,000 – ($5,000)]/($600,000/365 days)
    • $75,000/1644 = 45.62 days in A/R

In order to appropriately reflect the practice’s performance, it is important to understand and consider some of the nuances that could have an impact on the result, such as carrier that are slower to pay, recognition of accounts in collection, and claims that have aged past 90 or 120 days. It is financially prudent to compute this metric with and without these categories so that performance is accurately captured and not biased by factors that may negatively impact the finances.

Accounts receivable aging

A/R aging analysis is a comparison of the actual accounts receivable aging to the expected accounts receivable aging. Disproportionate percentages indicate an inconsistent policy or procedure in how insurance payer and patient collections are being performed.

The proportion by percentage of the total amount of accounts receivable should be:

Percent of total A/R Days
70% 0-30
10% 31-60
10% 61-90
10% Over 90 days

Most PM applications can generate an A/R aging report that breaks down claims based on the number of days they have been unpaid, totaled by payer. This helps to identify potential issues from a high level view so that you can prioritize how best to manage the A/R follow-up by dollar amount and by payer.

Days in A/R and A/R aging demonstrate a practice’s ability to quickly turn over A/R and collect all money due.

The bottom line is: You can’t know where you are going until you know where you are. Understanding the importance of your collection rate, days in A/R, and your accounts receivable aging is just the start to uncovering a breath of information that will put you on the path to higher medical practice performance.