Medical Practice Management
Feb 22

Physician practice accounts receivable management – Part II

A good indicator of how well the office is collecting its accounts is the percentage of receivables that is more than 90 days old. If the percentage is unusually high, something is wrong in the office. Again, a high percentage could be traced to a systems problem, a people problem, or a combination of both. A good benchmark for most medical practices is to keep receivables more than 90 days old at less than 15 to 20 percent of the total amount of accounts receivable. A good specific benchmark would be that no more than 18 percent of the accounts receivable should ever be 90 days or older. Medical practice statistical surveys, such as the one produced by the Medical Group Management Association, could be used for comparison. 

One way to manage accounts receivable is to calculate the accounts receivable ratio. Divide accounts receivable by average monthly gross production over the past 12-month period. 

The accounts receivable ratio is mainly used as a tool to assess the reasonableness of the current accounts receivable balance. For primary-care medical practices in which revenue is mainly derived from office work, the ratio should be between 1.0 and 2.0. For surgical practices or others with a heavy concentration of hospital services, the ratio should be between 2.0 and 3.0. Under no circumstances should the accounts receivable ratio exceed three times the average monthly gross production. A ratio that exceeds this benchmark indicates a severe collection problem. 

In addition to the accounts receivable ratio statistic, there are several other excellent A/R ratios you can and should be using; you should be using them to analyze not only your receivable balance, but the practice’s collection efforts as well: 

a)    Avg Days Receivable. This statistic is calculated by dividing the A/R balance by daily average charges [YTD Charges/365 days]. You can use 30.41 (365/12 months) in place of 365 days when calculating monthly ratios. You want to keep this figure under 90 days.

b)    Accounts Receivable Turnover Rate. This is calculated by dividing the A/R balance by average monthly receipts. This statistic indicates the number of months of work that have not yet been collected yet.

c)    Accounts Receivable Ratio. Calculate this analytical tool by dividing total accounts receivable by average monthly charges [either for the YTD or a rolling 12 month average]. For primary care and other office-based practices, this figure should be between 1.0 and 2.0 of average monthly charges. All other practices (ex. Specialty practices) should have between 2.0 and 3.0 of average monthly charges in their accounts receivable balance. Any practice that has over 4 times of average monthly charges in its accounts receivable balance has a collection problem! 

Reviewing and analyzing practice receivables on an ongoing basis should be a commonplace occurrence and exercise for ALL medical practices. Unfortunately I have seen quite often that it is not the case. Size of practice does not discriminate here – larger practices can be just as guilty of this offense as smaller ones.

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →