OCTOBER 2011 � VOLUME 60, NO. 9

group practice journalP U B L I C A T I O N O F T H E A M E R I C A N M E D I C A L G R O U P A S S O C I A T I O N®

Have Your Accounts ReceivableBecome Toxic? How to Identify

and Decontaminate ThemBY KEN CARR, M.S.L.

Reprinted from

GPJ_bw_GPJ_Mstr_bw.qxd 10/24/11 1:24 PM Page 1

as physician practices take a hard look at their accounts receivable

(AR), they often fi nd that services and billings are consistent or rising, yet money collected is decreasing. Th is drop in collections can be subtle and go unnoticed for months, or it can be sudden and dramatic.

A drop in collections can be

subtle and go unnoticed for

months.

By the time the problem is identifi ed, a very high percentage of receivables have become essentially uncollectable or toxic, signifi cantly

eroding profi tability. Unless a man-dated audit or another signifi cant event propels the practice to take a fresh, hard look at the numbers, the problem, unaddressed, will worsen over time.

Primary Issues Behind Toxic ARSeveral factors contribute to

toxic physician practice AR. First, Medicare and Medicaid reimburse-ments are being reduced and physi-cian practices are expected to absorb the diff erence.

Second, a practice’s most signifi -cant payers are probably a dynamic mix of insurance companies—and some are better payers than others. On top of that, recent healthcare

reform mandates are forcing insurance companies to shrink their medical loss ratios down to 15 per-cent or less. Th at means the diff er-ence between the money they collect in premiums and the money they pay on claims has to be less—and those cost savings are unlikely to come out of the insurance plans’ pockets.

Th ird, the changing payment landscape means that more cost responsibility shifts to patients. A 2009 study1 of national health expenditures by RelayHealth estimates that patients are paying roughly $300 billion annually in healthcare costs. But that number is expected to rise to nearly $500 billon a year by 2019. For practices, that shift is signifi cant. It’s one thing to manage collections from fi ve or six key insurers. It’s quite diff erent to manage collections of that same amount of money from several hun-dred to several thousand individual consumers.

Secondary Yet Signifi cant AR Toxicity Factors

Other factors can contribute to a toxic AR situation. One practice I worked with experienced a sudden and sustained increase in total AR, but the problem went undiscovered because key AR data were not being reported to the doctors. When we analyzed the data, we saw a huge spike in self-pay/no insurance AR, and a concurrent decrease in overall collections. A billing system software upgrade caused a problem around the time the AR began to spike upward. Th e practice billing team mistakenly assumed they had fi xed

Have Your Accounts Receivable Become Toxic? How to Identify and Decontaminate Them BY KEN CARR, M.S.L.

28 GROUP PRACTICE JOURNAL O C T O B E R 2 0 1 1

the issue and failed to monitor the situation.

Prior to the software upgrade, the practice had been charging between $8,000 and $9,000 monthly in self-pay. After the upgrade, the practice suddenly began charging between 6 and 10 times that amount in self-pay/no insurance, collecting only a small fraction of it. We discovered the upgrade had indeed caused key insurance cross-walks to be disrupt-ed or deleted. Th is caused patient accounts with insurance information to be recorded as “patient respon-sibility, with no insurance.” Th e incorrect self-pay AR was accumu-lating each month and accounts that would normally have been billed to insurance and collected were aging without payment or review in the AR system.

Increasingly sophisticated infor-mation systems for hospitals and physician practices can be double-edged swords. Th ese systems make it easier to manage increasingly complex fi nances. Yet, many business managers don’t know exactly what drives the formulas in the reporting tools. Often, that lack of under-standing is not an issue; a smart professional with good instincts may keep normal operations running smoothly “by feel” for years. But as so-called “normal” operations shift, even the best, most intuitive busi-ness managers may not be able to recognize a problem quickly or know how to fi x it. And when a crisis hits, misinterpretation of any key indica-tor can cause normal fi nances to deteriorate, sometimes disastrously.

AR toxicity problems exist in seemingly stable balance sheets, too. I worked with one practice whose gap between billings and collec-tions was much more signifi cant than it should have been, given its various service volume, fees, and other strengths. I pointed out that as much as $150,000 was going uncollected each month—unneces-sarily. Everyone in the practice was shocked. What the controller viewed as stability was actu-

TABLE 1

Are Your Processes Material or Immaterial?Material–relevant to the business

In your control

Within the billing system

Independent and easy to measure

Immaterial–irrelevant or of limited consequence

Out of your control

Outside the billing system

Interdependent, in which any one factor is actually related to multiple other factors

TABLE 2

Developing Benchmarks for Outcomes

If the Problem Is…

Staff Charges Payments Adjustments AR

Establish Acceptable Benchmark Ranges for

Attendance

Productivity

Feedback

QualityTraining

Captured at Service

Lag-to-Entry

SystemEntry

NetCollection

Rate

CreditBalances

All VisitsCaptured

Coding

SystemEntry

EDITransmitted

GrossCollection

Rate

Absolute $ Write-offs

Quality/Denials

System Entry

Error Reporting

Bad Debt

AccountingThroughout

Aging > 90, 120

Self-Pay

AR Days

Appeals/Denials

ally “invisible toxicity,” caused by normalization of ineffi ciencies and inaccuracies. Th e shortfall came in the form of controllable adjust-ments that weren’t monitored or periodically reviewed.

How to Diagnose a Toxicity ProblemTh e biggest diff erence between

a transient blip in receivables and a serious toxicity issue is time. It’s one way in which fi nancial and physi-cal health are similar. Th e longer a problem goes untreated, the more diffi cult (and expensive) it can be to fi nd and address the root cause.

Th e best way to recognize a toxic AR problem is to remain knowl-edgeable about your AR business processes, portfolio, and patient mix; understand subtle but signifi cant

shifts in those numbers; and address them before negative trends become entrenched. Look for:

■ Gradual or marked declines in ser-vice volume and cash collections

■ Gradual decreases in the quality of your receivables, with an increas-ing amount exceeding 90 days

■ Smaller paychecks compared to the prior year’s, especially if service volumes are comparable and other expenses are nominal

■ Losses in volume at practice loca-tions

■ Service utilization changes in the practice—are previously high-dol-lar procedures being replaced by an equal number of less-profi table procedures?

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O C T O B E R 2 0 1 1

■ Changes in insurance contracts that reduce the amount physicians are paid, or that place a higher burden on insured consumers

Trends in key AR metrics, including:

■ Service volume and fee schedules

■ Charges, adjustments, and pay-ment trends

■ Th e average age and days out-standing of your accounts receiv-able, by payer category

■ Bad debt and recovery

■ Credit balances

At the same time, the most criti-cal—and diffi cult—thing that prac-tice professionals can do to identify potential toxicity issues is to openly and honestly examine their own strengths and weaknesses. Everyone makes mistakes. At the same time, it’s often human nature to look to the external when a potential issue arises. We blame the weather. We blame medical reform legislation. We blame computers. But if we mis-interpret the information we have or willingly ignore key performance indicators, we can neither identify nor address the actual problems at hand. And when a business doesn’t understand a problem in the neces-sary context, the problem continues to accelerate over time.

Decontaminating Toxic Accounts Receivable

Fortunately, if you can recognize potential AR toxicity trends, you can take steps to remedy the situation.

1. Determine an acceptable gap between expected and actual collection performance. Look closely at the diff erence between your billings and collections on a month-to-month and year-to-year basis. No practice will collect for 100 percent of all services billed. At the same time, you can determine an acceptable perfor-mance range for your business. Th e Medical Group Manage-ment Association (MGMA)

can provide general statistics on how other practices around the country are doing. But be care-ful—those statistics should be for reference only; they shouldn’t be your only guideline. Your business analysis and forecasting should also seek to determine “optimal” (every available dollar to be collected is collected) and “near optimal” (optimal minus bad debt) performance ranges. By doing so, you can triangulate your specifi c practice expectations and target metrics to those of external benchmarks.

2. Evaluate any factors that may af-fect your accounts receivable. As you thoroughly examine potential causes of AR issues, determine which processes are easiest to address and which may require deeper exploration or can easily be misinterpreted. Ask yourself which processes in your business are material or immaterial (see Table 1).

Factors that fall into the left-hand column are usually fairly straightforward, easy to measure, and therefore easy to address. Processes in the right-hand column may be more diffi cult to address independently. If the bulk of your issues are in the right-hand column, you may want to bring in outside expertise to evaluate ways to address them. When evaluating these factors, it is wise to think through relation-ships. For example, patient copay after Medicare payments may be small or immaterial in a collec-tion sense; however, as it relates to government compliance and proper billing for these amounts, it is material and relevant. Dollar amounts don’t always dictate materiality.

3. Determine the maximum collec-tion value of your largest payers. Th e formula for that is:

Practice CPT utilization x Practice Fee Schedule = Gross

billable charges (GBC). CPT utilization x contracted allow-able or fee schedule = maximum collectability (MC). MC / GBC is Maximum Gross Collection Rate or GCR.

From there, you can compare the actual performance for each payer to your maximum collect-ability expectations. Th is can help determine specifi c possible causes for shortfall, which could include insuffi cient resources, incomplete processes, and improper account adjustments.

4. Create an action plan involving your AR team and other stake-holders. Armed with information about where your AR has been, where it is now, and where it should be, you should take the next step—establishing bench-marks for the outcomes you model in the key process areas shown in Table 2.

For each benchmark, develop concrete actions to achieve spe-cifi c goals. Immediate, short-term actions (“quick hits”) should be completed within 90 days, while actions that address long-term issues should be completed over a longer period of time. Th en, implement those action plans. You should see some results quite quickly, while others will emerge over time.

5. Stay on top of the remediation process. As you go through these steps, keep in mind that vigilance is crucial to success. Both AR and process issues are dynamic and fl uctuate over time. As a result, issues that can make your AR toxic cannot be completely elimi-nated. However, they can be well managed, like a chronic disease. Consistent communications are also essential. Th e stakeholders involved in and aff ected by the processes you review and address must understand the actions they’re being expected to take, the benchmarks they’re expected to

00 GROUP PRACTICE JOURNAL 30

achieve, and why they’re impor-tant. Develop contingency plans for correction should any material benchmark stray from the range. And, periodically review the as-sumptions driving your plan for clarity, accuracy, and relevance.

Th ese steps come together to form an intensive, in-depth, often complex process. While some physi-cian practices have the staff , time, and expertise to initiate, manage, and complete the process, it can be helpful and valid to reach out beyond your organization for additional sup-port and expertise. Consultants are often brought in to take over when a team has missed, misinterpreted, or mishandled problems. By that time, the situation is usually so bad that the consultant’s presence is viewed as intimidating and infl ammatory. However, smart business profession-

als will bring in outside expertise to help accurately identify and address issues before they become problems. In those cases, the consultant’s pres-ence is reassuring and helpful. More important, since such engagements usually happen before a situation gets out of hand, they are often a sign of the fi nance department’s foresight and initiative, rather than its incompetence.

In fact, these same processes are as valid for healthy practices as for troubled ones. Th ey can bring a practice from good to great – from profi table to very profi table. And as any business management team that has been able to take a practice from “toxicity containment” to “profi tabil-ity management” can attest, it does much more than improve business value.

References1. Centers for Medicare and Medicaid

Services. 2009. Based on National Health Expenditure data.

Ken Carr, B.A., M.S.-Law, is vice

president of revenue cycle consulting

at McKesson Practice Consulting

Solutions.

Reprinted with permission of The American Medical Group Association®

©Group Practice Journal October 2011