To provide the most advanced care for your patients, you’ve spent years of grueling study and practice in preparation for a future in health care. You’ve learned life-saving techniques, researched complex diseases, and perfected your listening skills to become a better diagnostician. Completion of your medical training nears, and at this point you feel medically groomed and ready to develop your own practice. Screech, halt, back up the bus.
For physicians, business billing acumen is another critical area of knowledge needed to evaluate an employment contract and to run a successful practice. Unfortunately, acquiring business knowledge is often sidelined until the ball is in play and headed down field.
As with any business, success in a medical practice is defined numerically—amount billed and amount collected. Physicians who don’t get the first down in understanding medical billing rules, regulations and collections are setting themselves up for serious financial challenges; the consequences are even more dire if you are embarking upon a solo practice.
Just as medicine has a language of its own, accounting also has terminology specific to its practice. As a physician, you straddle the fence between learning the first extremely well, while understanding enough of the second so that you can impart financial information to all stakeholders.
Becoming knowledgeable in the “foreign language” of accounting ensures that you know enough to limit practice losses from patients who are uninsured or underinsured, while still providing the patient care that’s needed.
In a business where medical professionals want to care for individuals without regard to economics, keeping the balance sheet in the black becomes even more critical. Approximately $125 billion goes uncollected by U.S. medical providers each year. Part of that delta comes from individual health care consumers who have been handed a heftier financial burden from insurance companies due to rising out-of-pocket costs.
As a result, the payment shift has altered financial policies at most medical practices; physicians now place even greater emphasis on patient communications, while the practice has an eagle eye on revenue cycle management.
Because billing and collections are crucial for practice sustainability, expect that your salary and compensation as a physician will likely be tied to this accounting quagmire in one of three ways.
1 Billings or Accounts Payable (A/P): The process of submission, follow up and appeal of claims with health insurance companies used to obtain payment for medical testing, treatments and procedures.
Payment formulas based on billings will likely pay you a percentage of the money billed for the work you have performed.
2 Collections or Accounts Receivable (A/R): The amount of money your practice has a right to collect in return for services rendered and billed. The medical care, already provided to the patient, is given on credit and will be paid at a later date, hopefully sooner rather than later.
Considering the recent payment shift where individuals shoulder more of the cost of care, a collection-based payment formula requires more due diligence because your pay will be dependent upon the employer’s billing capabilities. In this scenario, the practice must first be paid, before you receive compensation for your work.
3 Relative Value Units (RVUs): A value assigned by the Centers for Medicaid & Medicare Services (CMS) to each CPT/HCPCS code. That value represents the cost for providing the service.
RVUs represent a combined total of three components, each individually adjusted based upon geographic location. As such, these units require more calculations and can often overwhelm those first exposed to them. Those three components are:
- Physician work: Time and clinical skill for treating a patient during a visit
- Practice expense: Labor costs, administrative costs, building expense
- Professional liability insurance expense: Malpractice insurance premium costs
RVU-based compensation formulas only count patient encounters. For physicians practicing in a hospital setting, the amount of required administrative duties, all unpaid under this payment structure, must be weighed carefully.
Most employers don’t place physicians in an “eat what you kill” position for pay. Instead, productivity compensation is provided as additional incentives on top of base pay. Therefore, understanding how these numbers are calculated, knowing the history and average of practice collections, as well as the nuance involved in A/R numbers, will help you weigh one job offer against the next and have a financially healthier practice as your medical career blossoms.
Net 30/60/90—or never
One thing is known about spreadsheets and balance sheets: You don’t get a full picture from only one number. In evaluating the financial health of a practice, you must look at several A/R variables.
Days in A/R: This number results from dividing the total A/R by the average daily charges for the practice. (For example: 30 days in A/R means that the practice is due payment for the equivalent of 30 days of work.) One caveat: This number does not include the age of any payment.
A/R by Age: This number represents the time since billing for a particular service. Bookkeepers and accountants place payments due for services in specific buckets. You’ll find a 0 to 30-day bucket, 31 to 60-day bucket, a 61 to 90-day bucket and so on. Once a bill passes 90 days, the chances that a practice will receive full (or any payment) significantly declines. To calculate ongoing collection performance, divide the A/R in each bucket by the total A/R to get a percentage.
Bucketed A/R month over month: Monitoring the percentage of total A/R in each bucket every 30 days and comparing it to prior monthly performance will give you a landscape view of the practice’s financial health.
For new physicians who want to dig deeper into this “business of the business” area, check out the Healthcare Financial Management Association (HFMA). The organization’s website provides a wealth of information from its members, comprised of health care executives and financial managers from provider organizations, physician practices and health plan markets.
By investing the time now to learn about cash flow, balance sheets and accounts receivable, you will be in a better position to stay in control of working capital wherever your medical career takes you.
Jeff Hinds, MHA is president of Premier Physician Agency, and has guided hundreds of physicians through the dizzying job search process. He helps secure ideal practice opportunities for physicians, and with the help of a team of experts, provides security for physician contracts worth millions.