Practice Management Lab: What’s Coming In?

It seems obvious to say that you can’t achieve financial success without a healthy and consistent line of revenue. No matter what you do on the expense side, if there isn’t enough money coming in, you’re in trouble.

But how do you know if you’re approaching a revenue problem? How do you figure out what exactly is wrong?

That’s a little less obvious. But proper revenue analysis will give you a clear sense of the real value to your practice of your procedures, providers, patients, and payers. It will also demonstrate those things in your practice that are working and those that aren’t.

Here’s how to do it.

Measure days in A/R

First, measure and pay attention to your days in accounts receivable, also known as days in A/R or DAR. You can slice this basic measure of how long it takes to receive payment any one of several ways, including by payer, service, specialty, provider, and place of service, depending on which of these applies to your practice:

• DAR by Payer compares the time it takes to receive remittance from different payers and will help you identify which payers take forever - and therefore actually can cost you money. While dropping a payer may not be an option, these data may be useful in renegotiating your agreements, or at least help you know where to target your efforts to improve payment times. Depending on pay rates and other factors, you may even want to try steering your patient population away from slow payers in favor of those who pay more quickly.

• DAR by Service tells you how long it takes for you to receive payment for each service you perform. Correlate this with your service volume and rate data to determine where you should concentrate your efforts to speed payment. If there are things you can do to expedite the payment of your most frequent or valuable claims (for example, perhaps you need to include specific documentation when you submit a claim to obtain preauthorization), you need to know. A simple change in your work flow processes can mean much more cash for your practice. This is also an opportunity for you to evaluate less-profitable services that take longer to be paid and, if they are not critical to your practice, consider eliminating them.

• DAR by Provider helps you identify providers with a higher DAR rate than other providers for the same payer. If you have one provider with a much higher-than-average DAR, it’s time to ask questions. Is the provider credentialed? Is there a problem with her coding or documentation? Is that provider not submitting charges promptly? Checking all the data can help you determine the problem.

All this data can be easier to interpret if you can pull it into a single graph. Do so periodically to measure changes in revenue over time.

Cost of slow pays

The number of days in A/R sets an important benchmark, because the faster you can obtain payment for your services, the better. With your overhead costs rising, your revenue becomes less valuable to you the longer it remains in someone else’s hands. In the chart to the left, you can see how $100,000 in claims loses about $800 in value after 30 days, and more than $2,300 in value after 90 days.

Examine your real collection rates

It’s one thing to be able to pull in revenue in fast, but you also need to make sure you are picking up all the money you’ve earned. Knowing how much your different payers and patients are truly paying you for your services and how that compares with your posted rates is key to predicting future revenue.

We look at collection rates in two ways - gross collections and net collections. Net collections is the amount you actually collect from payers and patients. Gross collections are what you theoretically should collect - your posted rates - for the services you’ve performed. Comparing the two is a common practice in any business, as it’s an effective way to determine where you can best focus your efforts to increase your collections. However, many practices make the classic mistake of setting unrealistically high rates for their services, believing this will help them negotiate better rates with payers and increase patient collections. But doing so can skew a practice’s financial analyses by artificially inflating its gross collections.

Our experience also suggests that patients are actually less likely to pay even a portion of their bills when faced with astronomically high rates.

Bottom line: Set reasonable fees, and concentrate on bringing in what you’ve truly worked for rather than playing with your charges so you feel better.

Revenue realization rate

Tracking how long it takes you to realize most of your revenue for a given month is a great way to begin identifying the areas in which you tend to have lingering balances. Revenue realization is the process of resolving all outstanding receivables into cash or adjustments. What part of that payment came from the patient? From the insurer? And how much was adjusted - or worse, written off?

We recommend charting revenue realization for the past six to 12 months including your total charges, payments, adjustments, and bad debt. The trend over time should be increased realization. A completely resolved or realized claim is one that has been entirely paid by all appropriate parties. Under typical circumstances, you realize a portion of a claim when you see the patient and collect his copayment, then realize more of the claim when you receive that patient’s insurance payment. What’s left, if anything, is usually transferred and billed to the patient. In such a case, the claim isn’t fully realized until you receive that second payment from the patient.

Revenue trending

So, say you heed this advice and are getting money in fast and tracking how and when it is realized. Everything looks great now, but how will things look in six months, after you purchase that DEXA machine? You have to project revenues as your practice tries to add to its patient base, build additional facilities, hire more providers and staff, or perhaps change its focus. When doing these analyses, evaluate and assess your production and reimbursement cycles as well as your costs.

For example, if a practice is considering adding a physician, it should know whether that physician will bring along a patient base or not, what facility costs that provider will require, and other individual operating costs such as insurance, staff, and supplies. Then, with a solid grounding in the practice’s revenue realization cycles, the management team can assess the potential provider’s unit costs and his projected production to determine if these factors will allow the practice to meet its current profit margin. The same type of analysis would also be appropriate when a practice is considering purchasing high-cost diagnostic equipment. You must ensure that providing the services that equipment enables is more cost-effective than outsourcing.

Fruit for the picking

Conducting revenue analyses is a great way to find the low-hanging fruit that can boost your bottom line. Determine what pays well, and you can do more of it; figure out what pays poorly, and you can fix it or stop doing it.

In addition to the no-brainers you will find, good revenue analysis practices will yield great benefits as a practice develops its overall ability to make sound business decisions. Basing such decisions on sound revenue projections and a detailed understanding of the factors affecting your revenue stream is fundamental to your business’s long-term growth and success.

Alan Morrison is an engagement manager for athenahealth, a revenue cycle management company for medical practices whose database of billing information is the statistical basis for this series. He can be reached via editor@physicianspractice.com.

This article originally appeared in the October 2006 issue of Physicians Practice.