A full schedule does not always mean the money is making it to the bank

A profit and loss statement is created from the recording of revenue or collections, and expenses as they are paid or accrued during a certain period of time. From a profit and loss statement perspective, a healthcare practice can show a profit, but the view from the bank account tells a different story. That usually happens when services, collections and expenses do not move at the same pace. You may provide care this month, wait on insurance reimbursement next month and collect patient balances even later. Meanwhile, payroll, rent, supplies, vendor bills, loan payments, and taxes still have to be paid.

If your practice looks good on paper but you are feeling the crunch in your bank account, it’s time to investigate why by taking a dive into accounts receivable, insurance and patient collections, or your accounting method.

These are common practice management areas that have a significant impact on your profit and ultimately cash in the bank for your practice. This does not always mean the practice is failing. It usually means there are gaps. With proper guidance, these gaps can often be remedied so you no longer feel the crunch!

Is revenue the same as cash?

No, revenue is not the same as cash. Revenue is the value of services provided. Cash is what was actually collected and available to spend.

A practice owner may say, “We had a great month, but I don’t see it in the bank.”

Revenue is the first line of a profit and loss statement and is often the focus. The higher the number, the more a practice owner feels they are in good shape. Cash is part of the bank account balance and if there isn’t enough cash in the bank to cover expenses, this is a red flag for most business owners and can often be the first sign of problems.

When this happens, monitoring accounts receivable should be the practice owner’s first step in determining the cause of cash flow issues.

How does accounts receivable affect cash flow?

Accounts receivable represents money owed to the practice, consisting of a combination of insurance or patient amounts. As revenue is recorded, this increases the accounts receivable balance as the practice has provided the care but has not collected the cash. That creates pressure on a practice because expenses, payroll, supplies, utilities continue whether accounts receivable balances are collected or not.

As your accounts receivable ages, the harder it becomes to collect.

An insurance claim submitted today may not be paid for weeks. If documentation is missing, the claim will be denied and requires the team to spend time resubmitting. Patient balances can also sit if the practice does not follow through on office procedures for collections at the time of service.

While revenue and accounts receivable balances are rising, the practice can feel busier without becoming more financially stable.

Accounts receivable is not just a billing number. It is a cash flow number.

What A/R numbers should I watch?

The total A/R balance is often unhelpful in discovering problems. Using KPIs, or Key Performance Indicators, are the best tools for monitoring accounts receivable.

Net Collection Rate:

Formula = Payments Received minus Refunds divided by Total Charges minus Contractual Adjustments.

This formula helps a practice owner evaluate how effectively the practice is collecting revenue that they are entitled to receive. For most practices, a net collection rate of 95% shows that they are effective in their collection process. Less than 90% can indicate that there are inefficiencies in billing or insurance claim denials.

Days in A/R:

Formula = Average Accounts Receivable Balance divided by Average Daily Charges

Days in A/R is especially helpful because it shows how long it is taking to collect after services are provided. If that number keeps climbing, the practice may be generating revenue, but it takes too long to collect. If it is taking longer than 40 days to collect, you may feel the pinch in your bank account as you are paying expenses while not collecting on services from 40 days ago.

Reviewing these formulas can be a clue into issues with accounts receivable impacting cash flow.

Why do insurance claims denials create such a cash flow problem?

Insurance denials are frustrating because it is often a paperwork problem. It can take up a significant amount of time for your staff, redoing work they have already performed, and requiring continuous follow-up until the claim is approved.

A practice owner may want to review the Denial Rate on Submitted Claims. Using either the total dollar amount of denied claims divided by total dollar amount of submitted claims or total number of denied claims divided by total number of submitted claims, an efficient practice should see less than 5% denial rate. Any more than this could be sign of issues with the insurance claims process.

Whether it’s a people problem or process issue, insurance denials are impacting the amount of collections from insurance companies. Less insurance denials will allow for faster payments.

Can patient balances impact cash flow?

Yes. Patient balances can be an issue for cash flow, and they are mostly driven by office processes involving staff.

If patient responsibility and co-pays are not discussed clearly before services are provided, collected at the time of service or followed up on consistently, balances can age quickly. The longer a balance sits, the less likely it is to be collected in full.

This can happen even in good practices, especially when the front office team is stretched thin. If phones are ringing, patients are checking in, insurance is being verified and appointments are being managed, collections can slip.

A few patient balances may not feel like a major problem. Across hundreds or thousands of visits, they can become a significant drain on cash.

How does the accounting method play into this?

The accounting method is used to recognize revenue and expenses for financial and tax purposes.

On cash basis, revenue is recognized when payments are received and expenses are deducted when paid. For practice owners, it’s easier to understand and will match up to what’s happening in the bank account. However, it may not show the revenue that has been earned but not collected. Using the cash basis method still requires monitoring A/R balances and reports for a full picture of the practice’s health.

On accrual basis, revenue is recognized when earned and expenses deducted when incurred. This may give a better picture of revenue, but it can also make the practice look profitable even if cash flow tells a different story.

Both methods have their flaws in reporting that require a deeper dive into understanding the numbers.

What reports should I review each month?

Every practice owner should perform a monthly review of the basic financial statements: Profit and loss, Balance sheet, and Cash flow. Notice any trends, such as substantial changes from one period to the next or any unusually high or low amounts from previous periods.

Next, all EHR systems should provide additional reports that are beneficial for a practice owner to review. Revenue by Provider, Collections by Provider, Accounts Receivable Aging, Contractual Adjustments or Write-offs are a few that can provide insight into the health of a practice.

The goal is not to drown the owner in reports. The goal is to answer the questions that matter to most practice owners:

  • Are we collecting what we earn?
  • Where are we spending the most?
  • Are we growing profitably?
  • Can we afford expansion of our practice or team?

What should I do if my practice looks profitable but cash still feels tight?

Finding the cause of inefficiencies in your practice’s insurance and payment collections that negatively impact your cash flow can be difficult. Sometimes having another set of eyes can see this easier than those in the trenches.

Our Adams Brown Healthcare team has experienced professionals that can help you review your financial reports and procedures and determine actions that can help you improve your practice collections.

Contact an Adam Brown healthcare advisor today.