Accounts receivable in your practice: Four common myths debunked

April 1, 2008

The typical medical practice knows it is important to keep an eye on the accounts receivable, yet physicians are sometimes not sure how to analyze them.

I've identified four common myths that keep physicians from understanding their AR.

Lower is not always better

A low AR may give you a false sense of security. In reality, it could be an indication of problems in reporting charges or making adjustments. Although the total AR varies by specialty, the typical medical practice has an AR that is between one-and-a-half and two times that of the average monthly charges.

There are a number of reasons the AR could be down. If the charges are not being entered into the system, your AR will be lower. A reduced AR occurs when larger-than-usual, unexpected write-offs are taken. For example, if the billing department is not collecting in a timely manner, accounts begin to age and at some point may be written off as uncollectible. It is better to be aggressive at an earlier stage. Beyond this, a sudden drop in AR just might mean an embezzler is in your midst, pocketing payments and adjusting the account balances for the same amount.

Keeping a pulse on AR over 90 days is critical. A good benchmark for AR aged at 120 days or more is between 15% and 20% of the total AR. Practices should closely monitor accounts that age between 30 and 60 days and take aggressive collection actions. Practices that do this are far more likely to perform within the desired benchmark. If the billing department is unsuccessful in its efforts to collect from the responsible party within 60 days, it's time to bring in the experts who have the skills to take effective pre-collection actions that improve your recovery rate. When a practice lets the account age beyond 120 days, unrealistic expectations emerge on AR that will yield a lower percentage return. In other words, don't wait too long.

Myth #2: Ninety-five percent of the accounts receivable can be collected.

For most medical practices, the dollar value for the total AR is inflated because the fee schedule is far higher than the contracted rate most physicians have agreed to accept from the majority of the third-party payers in the community. The best way to assess the potential collection on the AR is to look at a historical picture of the practice's performance-charges, receipts, and adjustments-separating contract adjustments from bad debt write-offs. If the adjustments are averaging 25% of charges, then the maximum collected will be 75% of charges. In this example, if the average monthly AR is $100,000, the practice is likely to collect an average of less than $75,000. If this same practice has a 90% collection ratio, the collections would average $65,000 per month.