The Doctor’s Complete Guide to Accounts Receivable Management

Accounts receivable management in healthcare is a constant battle for dentists and physicians working in private practice.

As the financial burden of healthcare shifts towards the patient in the form of higher deductibles and copays, doctors who don’t have a reliable collection process are in trouble. Neglecting your accounts receivable management is a recipe for poor cash flow and lost revenue.

What is accounts receivable? What is the goal of AR management? Why is it important? How do you measure AR? What steps can I take to improve?

This guide to accounts receivable management in the healthcare industry covers everything you need to know about how you can improve this part of your practice.

• What are accounts receivable?
• What is the goal of accounts receivable management in healthcare?
• Why should I improve my accounts receivable management?
• How to measure accounts receivable and set benchmarks for your practice
• How to improve accounts receivable management in healthcare
• Tips for reducing insurance claim denials
• Conclusion

What are accounts receivable?

Accounts receivable (AR) is the revenue that you have billed for but have not yet collected. It’s money owed to you. AR consists of any amounts due from patients, insurance companies or other guarantors.

What is the goal of accounts receivable management in healthcare?

The primary goal of accounts receivable management in healthcare is to maintain maximum cash flow into the medical or dental practice by minimizing the collection period and the costs associated.

Offices that are well managed strive to create standard processes for managing their AR from start to finish – from the moment a patient schedules a new appointment, to when they collect their final payment. They train their staff in this process, communicate clearly with their patients, and measure their progress over time.

Why should I improve my accounts receivable management?

As a healthcare business consultant, it is frustrating for us to see doctors ignore a growing AR balance and suffer the consequences that impacts their practice. Unmanaged AR can put a big strain on cash flow and result in lost revenue.

The rising popularity of high deductible insurance plans have forced many practices to pay more attention to their accounts receivable management. Doctors are more dependent on patients footing a larger portion of their bill. These changes call for renewed attention and innovation in the billing and collecting functions of the practice.

Costs are shifting to patients

In recent years, insurers have shifted more of the cost burden onto patients in the form of higher deductibles and copays.

According to the Kaiser Family Foundation, in the decade between 2006 and 2016, the average payments by enrollees towards deductibles rose 176% from $151 to $417.

Low cost insurance plans are attractive at first, but many consumers don’t fully grasp the implications of their deductible until they get the bill. In an article for Medical Economics, Andrew Graham, MBA, president and chief executive officer of Clinic Service, explains how high deductible plans are not always fully understood.

Consumers opt for the lower-priced insurance with the high deductible, because they are optimistic they won’t have to use it. When the deductible shows up, they are shocked. They don’t always understand the deductible requires funding on their end.

Andrew Graham

Unless a patient has saved money in a Health Savings plan, the doctor must compete for the dollars that a patient has for every other discretionary expenditure. And as you can probably guess, patients are not very reliable when it comes to paying large out-of-pocket medical expenses.

A 2010 report by the consulting firm McKinsey & Company found that consumers rank medical bills seventh in importance, behind cell phones and internet providers.

Consumer habits are not going to change anytime soon. The rise in popularity of low-cost, high deductible plans will likely continue. This trend behooves medical and dental practices to optimize their billing and accounts receivable process to collect patient payments in order to maintain healthy cash flow into the business.

Improve your cash flow

As patients are expected to pay more, the risks of a cash flow shortage to the practice increases. This is especially true during the first few months of the year when deductibles reset. Improving the accounts receivable management processes in healthcare is one of your best defenses against cash flow shortages.

In general, managing your cash flow in the healthcare industry is tricky business. It can be difficult to predict with certainty how much revenue you will generate each month, how much will be written off, or when you will get paid. Your accounts receivable process has a lot to do with smoothing out those fluctuations so that you can more accurately predict the cash balance of the business.

Without robust accounts receivable management, you are potentially leaving a lot of money on the table. That’s cash you could be using to:

• Pay your staff
• Invest in new equipment
• Market your practice
• Pay off student loans
• PAY YOURSELF!

Bringing cash into the business isn’t the only compelling reason to improve your accounts receivable process. Minimizing the collection period can also cuts down on the costs associated with managing a large AR balance.

Avoid the “AR tax”

There are many costs associated with carrying an AR balance. Some are unavoidable. Others crop up due to a lack of oversight and good processes. While not all of the costs can be quantified precisely, it’s important to be cognizant of what they are.

There are three cost factors that combine to form the “AR tax”. They are:

1. Hidden costs
2. Administrative costs
3. Bad debt expense

Each cost is minimized as you improve your accounts receivable management.

Hidden Costs

The hidden costs associated with an accounts receivable balance is the cost of interest and inflation.

These costs won’t show up on your income statement, because they’re not real expenses that you incur. But it’s an important exercise to recognize that these costs do exist.

Interest

Think of it this way. Every balance that hits your accounts receivable is essentially the same as an interest free loan. You have provided the service, but have agreed to accept payment at a later date.

If instead you had received that payment the day your services were rendered and then turned around and invested it, the interest you could have earned is an opportunity cost to the practice.

Some practices do in fact charge monthly interest on patient balances over 30 days. Consider a 1.5% interest rate on a $100k accounts receivable balance. That’s equivalent to an additional $18k every year!

If a practice does charge interest on patient balances, they must comply with the regulations put in place by the Federal Truth and Lending Act. For this reason, most medical and dental practices choose not to. However, we mention it here as a reminder that there are real financial implications of extending free credit.

Inflation

According to InflationData.com, the annual inflation rate for the 12 months ending April 2019 was 2%. This means that everything today costs 2% more on average than it did just one year ago.

Inflation is the impetus behind the time value of money. In Econ 101, we learned that a dollar earned today is worth more than a dollar earned tomorrow.

A $100k accounts receivable balance aged 3 months will have lost approximately $500 in value due to 2% inflation.

The hidden costs of interest and inflation do not show up on the financial statements, nor are they substantial compared to the administrative costs and bad debt expense.

But we mention them here first because they are often overlooked. The cost of carrying a balance due to the practice can add up in a hurry, even though you may not see it.

Administrative Costs

Administrative costs associated with accounts receivable management include the wages you pay your staff to mail statements and follow-up with patients on the phone. Also included is the cost of postage, and any other extraneous expenses incurred while managing AR. These are the tangible costs that you see on your monthly financial statements.

Your administrative costs related to managing AR will increase along with your total balance. When payments go uncollected the first time around, you end up spending more money on postage to resend billing statements and time for you staff to contact delinquent patients.

SwervePay Health Services estimates the administrative costs of mailing paper statements is $2.41 per patient.

In addition to collecting from patients, part of the revenue cycle management will include having  to deal with third-party payers or insurance companies.

Keep a close eye on the accounts receivable due from insurance companies. Follow-up with the carriers if balances exceed 30 to 45 days. Insurance companies are typically required to make payment within 45 days of receiving a “clean claim”.  

Even though insurance companies have an obligation to pay, they are quick to reject claims for a multitude of reasons. Invalid insurance, missing information, and coding errors are just a few.

Your accounts receivable team should always work their rejected insurance claims first because it is money that is easiest to collect. If you find that your staff is dealing with a lot of rejected claims, track the reasons why and fix the problems through your process on the front-end of the claim.

It’s important to have an efficient accounts receivable management process to avoid rebilling because the administrative costs of refiling claims isn’t cheap. By one estimate, it costs the practice $25 to work each claim that is rejected!

Bad Debt Expense

Bad debt expense includes all of the invoice write-offs that the practice determines to be uncollectible. This happens when a patient cannot or does not pay their balance.

When outstanding payments linger, the probability of collecting your full amount decreases with time. For this reason, we suggest focusing on your patient responsibility accounts receivable balances by the following aging buckets:

• 0-29 days (current)
• 30-89 days
• >90 days

The Physician’s Guide to the Business of Medicine cites that on average you are only likely to receive:

• 93.4% of money due 30 days old
• 85.2% of money due 60 days old
• 73.1% of money due 90 days old

Accounts receivable management in healthcare can be a driving engine for your profitability. By working to improve these processes, your practice will bring in more revenue and reduce costs.

Your first step towards improvement begins like any other – measuring your current performance and setting goals for tomorrow.

How to measure accounts receivable and set benchmarks for your practice

How do you track accounts receivable? Like any other practice statistic, you can measure AR and set performance goals to drive continuous improvement.

For our clients, we track the accounts receivable balance that has aged over 90 days, the number of days in AR, and the net collection rate. These are the 3 accounts receivable metrics every doctor should know.

AR >90 Days

Accounts that have aged over 90 days are at higher risk for going uncollected. Therefore, it’s very important to keep track of how much money is moving into this aged category from month to month.

The formula is simple:

% >90 Days = AR >90 days / Total AR

We recommend that you set a 10% benchmark for this metric.

If your patient AR balance ages above this threshold, it’s a good indicator that there are opportunities to improve your collection process.

Timely insurance filing

Aging AR balances owed by insurance companies can be denied due to timely filing clauses in your contract. If you try to submit a claim late, you can be hit with a late filing denial.

The worst part about this scenario, is that you typically cannot appeal such denials. So it’s really important that your accounts receivable management staff is aware of your contractual filing deadlines.

Here is a list of some general timely filing deadlines by carrier:

Medicare	1 year
Delta Dental	1 year
Blue Cross	6 months
Cigna	6 months
Aetna	6 months
United Healthcare	90 days
Medicaid	90 days (in most states)

Days in AR

The number of days in AR is a helpful metric for judging whether or not your accounts receivable balance has grown too large relative to your gross charges.

Days in AR is calculated simply by dividing your total AR balance by your average daily gross charges.

Days in AR = AR Balance / Avg Daily Gross Charges

You can calculate your average daily gross charges by dividing your total gross charges for the past year by 365, or your total gross charges from the past 6 months by 182.5. Because gross charges can fluctuate significantly from one month to the next, it’s best to use a 6-12 month sample size.

Our standard benchmark for days in AR is 45 days.

Depending upon your specialty, if your days in AR go beyond this, you should be watching it carefully each month. If the total nears 60 days, you should be questioning your accounts receivable staff and investigate the balances in more detail.

Ask to see a detailed listing of account balances over, say $100, and request that the report be sorted with the largest balances first. Scanning this report will help identify where the problems are and provide you with the basis for working on a corrective plan with your team.

Net Collection Rate

The net collection rate (NCR) tells you how much you collected relative to what you expected to collect. The formula is collections divided by gross charges minus adjustments.

NCR = Collections / (Gross Charges – Adjustments)

For example, say in the month of January Dr. Jane had gross charges of $200,000 and $30,000 of contractual insurance adjustments. If she collects $165,000 then her net collection rate would be 97% for the month.

A good practice will have an annual net collection rate between 95-100%. In our example, Dr. Jane averaged 98% for the year – not bad!

Notice that the NCR for Dr. Jane was above 100% in the month of September. How is that possible?

Net collection rate, as with most measurements, is a static snapshot in time. The money Dr. Jane collects in the month of September may have been charged a month or two earlier. Thus it’s important to realize that the NCR does not necessarily measure what was collected and generated in that month.

Other AR Metrics

Of course, there are many other helpful ways to measure and monitor accounts receivable. Some may be more appropriate to your business than others.

However, the key is to stay consistent. Pick a method and stick with it.

Here are some additional metrics you might consider to help measure and monitor your AR:

• Percentage of bad debt to charges
• Gross collection ratio
• Average time span from charge to billing
• Total outstanding dollars
• Number of billings per week
• Dollars outstanding as a percentage of AR
• Collection ratio by financial class

How to improve accounts receivable management in healthcare

Today’s patients pay more attention to the value and quality of the care they receive. This comes in direct response to higher out-of-pocket costs.

In addition, the cost of the care you administer may come as a surprise to some patients who do not see any tangible benefits.

For example, consider the work of an anesthesiologist who sedates the patient, monitors their vital signs, and brings the patient back to consciousness when surgery is completed. If the anesthesiologist never meets with the patient and explains their role, the patient may not value of the anesthesiologist’s work because their focus is only on the final outcome of the surgery.

So when this patient receives the bill for the anesthesiologist, it’s not hard to imagine that they may be a bit surprised.

They might think to themselves, “Why must I pay for this?  Isn’t this covered by the hospital charge? The anesthesiologist didn’t fix my knee!”

When patients are surprised by their bill, and are responsible for paying a large out-of-pocket deductible, collection can become much more difficult.

To avoid this outcome, your AR process must be focused on serving the patient’s needs. Managing patient expectations from the start, offering flexible payment options, training your staff on effective communication, and investing in an automated billing system are just four tactics we will discuss below.

Manage patient expectations

Managing patient expectations is all about communicating financial obligation ahead of time so that they’re not surprised when the bill arrives. Patients must be made aware of your estimated costs, billing process, and payment options. It’s a critical piece of your AR process to guide your patients from the very beginning.

Don’t wait for the patient to arrive in your office. Managing their payment expectations begins from the moment they schedule an appointment, which could be on the phone or online.

In an article for Physicians Practice, Karen Lake, healthcare consultant with the firm Pearce, Bevill, Leesburg, Moore says,

Call patients before the appointment to talk about pre-authorization and benefits. Say something like, ‘Your copay is $40, and that is due at the time of the visit.

Karen Lake

The same goal can be achieved using automated emails or text reminders. Your practice should take advantage of automation whenever possible to maintain frequent communication with your patients.

Your next step on the patient journey is to communicate your financial policy when patients arrive for their first visit. A simple solution is to give the patient a printed handout that explains the billing and insurance policy in simple terms that they can understand.

In addition to the standard forms, such as HIPAA forms and medical history, give patients a simple flyer with definitions of common billing and insurance terms.

Kenneth Hertz, FACMPE, principal consultant at MGMA Health Care Consulting Group

Many patients are in the dark about how billing and their insurance works. Your handout should give them a brief education on how billing is processed, including when they should expect a bill and approximately how much their insurance will cover.

Here are 5 strategies on how to share your financial policy with patients:

1. Keep it simple. Break down the policy into short sections that are easy to read.
2. Share it. Include it with other onboarding paperwork and link to it on your website.
3. Collect signatures. Have the staff review the policy with patients. This can be especially helpful for older patients or those who do not speak English as well.
4. Remind returning patients. Ask for the policy to be signed each time a patient visits the office.
5. Inform your staff. Review the policies regularly to be sure they are clear, accurate, and still reflect the practice’s policies.

Continue to work with your front office staff to find the most effective way for your practice to be transparent about your financial policy with your patients. The more your patients know and understand their financial obligation, the easier it will be to collect their bill.

Offer flexible payment options

How do you collect money from your patients? Are you making it convenient for them to pay their bill right away?

Different patient demographics expect to be able to settle their bill in ways that are convenient or familiar to them. Older patients may prefer paper invoices and writing checks, while the younger generation may be more comfortable with online credit card payments.

Good old fashioned mail is still a reliable and familiar method for sending your statements. And many patients will still appreciate having that option available. But the larger trend is moving towards paying statements online.

According to Mail My Statements, the majority of patients now prefer to receive their bills and pay them online.

Implementing online payment solutions has been incredibly successful for some practices. The Doctor, a medical services management company, reported that in the first month of switching to paperless billing, they collected 40% of their AR that was nearly 2 years old. Other practices are finding even more ways to utilize technology to manage their accounts receivable.

Busy offices have found that patient pre-registration, such as adding a check-in kiosk to their waiting area, not only improved workflow, but also helped them collect outstanding balances.

In an article for Physicians Practice, Marilyn Boichat, the director of practice management at Coastal Medical of Rhode Island explained that “when patients checked in using the kiosk, the computer would remind them of their balances and give them the option to make a partial payment. Most patients ended up paying off those old balances in full.”

Collection today must be flexible. Patients expect convenience, and it’s your job to provide that service for them.

Implement credit card payments and an online payment portal if you don’t already. And keep your eyes open for additional ways that make sense for your practice to make it faster and more convenient for patients to pay their bill.

Train your staff how to communicate effectively

Doctors should remain the caregiver that they are. Patient collections should be delegated to staff who are trained how to communicate effectively through the collection process.

How your staff communicates with patients through the accounts receivable process is critical for encouraging timely payments. It’s also one of the best opportunities you have to build your relationship with your patients and offer a level of service that exceeds your competition.

Healthcare consumer loyalty is influenced by how early and how often you communicate with patients about their estimated cost of care and their payment options. Consumers remember how they’re treated while they’re repaying their medical bill and will compare their experiences with friends.

Bruce Haupt, President and CEO of ClearBalance

Be direct and show respect

Don’t separate effective communication from tactful communication. Your staff must be direct regarding your financial policy, but they should always show respect for patients during the collection process.

Communication training should teach your staff to:

• Never treat the patient as an adversary
• Always start by assuming that the patient is willing to pay
• Avoid an argumentative tone
• Stick to the facts
• Be flexible, but don’t cave in
• Appeal to the debtors needs (honesty, pride, or anxiety)
• Be cooperative
• Know when to listen

Use a script

A patient collection script can be a great tool for training your staff how to communicate effectively with patients. Sometimes a subtle change in how you state a question can make a big difference.

For example, consider the front desk staff who asks a patient, “Are you able to pay your bill today?” Versus the front desk staff who asks, “And, how would you like to pay your bill today? We accept cash, check, or credit card.”

The latter is a much more effective way of encouraging immediate payment. The same type of communication tactics can be implemented at all stages of the collection process.

Invest in a better billing system

Don’t overlook your billing system. Healthcare is a complicated and fast-paced business. In order to keep up, you really need to consider investing in a powerful billing system that can manage a lot of the front end tasks automatically.

If you are considering a new practice management system, pay close attention and work with your healthcare consultant to vet the billing functionality. Investing in the right technology will pay for itself.

Cyndi Walker, President of Medicus Billing and Consulting and member of the National Society of Certified Healthcare Business Consultants, provided us with a list of billing system necessities to assist with insurance denials and collections.

Note the heavy emphasis on automated functions and capabilities:

• Automated eligibility
• Automated rejection lists
• Automated electronic claim rejection dashboard
• Automated electronic payment posting with explanation of benefits available on the patient dashboard
• Automated electronic patient statements that are sent weekly
• Patient balance and eligibility should show on the check-in screen
• Charges are connected to appointments so the system warns you when a date of service is not scheduled
• Generates reports to PDF and Excel
• Ability to run custom reports with all claim and payment data to excel for internal audits
• The ability to write charge management rules so that you can scrub charges prior to sending claims

A powerful billing system that works with automation has the potential to be a huge productivity boost to your accounts receivable management team. This is especially true for small medical and dental practices that cannot afford a large supporting staff.

A good system will help prevent you from making mistakes and make it easier for you to see the data you need to make better decisions.

Tips for reducing insurance claim denials

A rule of thumb for reducing your accounts receivable is to concentrate your energies where there is the greatest promise of return for the least amount of effort.

For the majority of practices, this means focusing on reducing the amount of denied claims from insurance companies.

Focus on the front desk

Accounts receivable management is not a standalone back room operation. In fact, the majority of insurance claim rejections are controlled by the front desk.

In addition to answering the phone and checking in patients, the front desk staff is often responsible for the following:

• Verify patient insurance and demographic information
• Collect patient copays and estimating deductibles
• Collect overdue balances from previous visits
• Scan patient insurance cards into the billing system
• Post all payments received
• Prepare a daily collection summary with the deposit slip for the manager
• Deposit checks into the bank

Does your front desk staff do everything on this list? Have they been trained how? Do they have the tools they need to be successful? Or are they overwhelmed and unable to keep up?

Each task listed above contribute to a robust AR process. Preventable mistakes start here. If you want to improve your accounts receivable, it pays to focus on training the front desk staff and invest in resources to help them perform their job more effectively.

Always verify insurance benefits

Invalid insurance is the #1 reason for rejected claims for the majority of practices.

The cause is failure to properly verify benefits at the time of service.

Cyndi Walker gives the following advice for improvement:

• Verify benefits for every patient, on every visit
• Utilize your billing system to automate insurance verification
• Scan a copy of the patient’s insurance card into the billing system so you can go back and check for incorrect ID number, patient name, or demographic information
• Managers should confirm that their staff are performing verifications daily
• Track the number of invalid insurance claims and reward the team when they meet their goal

Conclusion

Efficient accounts receivable management in healthcare is one area of practice management that can greatly improve your bottom line profits. When you understand the cost of carrying an unpaid balance, and measure your performance with the right metrics, you will begin to see opportunities to improve.

Remember that you don’t need to do it alone. Surround yourself with a dedicated staff and a Certified Healthcare Business Consultant. We’re here to help you achieve your goals of a more profitable and rewarding practice.