Are my patient receivables a problem?

A question from one of our intrepid readers: 

“How do you tell if your practice receivables are out of control?”

Outstanding question.  Of course, the answer is in the data and there are quite a number of ways to determine whether or not your receivables are under control or require some additional work. 

First, keep the following in mind: not all receivables are the same.  An amount due to you that is 10 days old has a much higher probability of being collected in general than one that is 120 days old.  When a receivable gets to 120 days old, chances are strong that the patient has left town, forgot about the amount due or is not in the same financial position as 120 days before.  Also, the collectability of a receivable is much different if you have not yet communicated to the patient that an amount has been earned (these “unbilled receivables” are generally limited to companies subject to accounting rules relating to payment plans that do not equal amounts earned in a particular period).

Second, keep in mind that in just about all practices, there will be amounts past due.  Shooting for a goal of zero receivables is a fruitless exercise.  People will get behind or forget a payment.  Dad will bring the child in for an appointment, have a past due amount, but won’t pay anything until mom signs off.   And, of course, you will perform procedures that will not be reimbursed by insurance until 30-60 days later. Obviously, you want to control past dues as much as possible, but the presence of receivables are a fact of life. 

Third, you need to have a consistent metric that has relevance to your practice.  If you have a practice in which the vast majority of your patients have some kind of government support insurance (Medicare, Medicaid), your expectation will be different than a situation with nothing but private payments made over a period of years.

We use a very simple computation in our offices which is to take the total amount of receivables as of the end of a month divided by cash collections for the month.  Our goal is typically to have a percentage between 10 and 12%.  

At this point, those far more versed in statistics and computations begin to point out the potential pitfalls with the computation.  Instead of dividing a stock (the end of month balance) by a flow (money collected over the period of a month), an average of receivables might better apply.  And so forth.

Any refinement of the number makes sense -- as long as computation isn’t excessively time consuming.  But the most important point here is to be consistent in the way you compute your number and evaluate trends and unusual circumstances.  For example, if the number is around 10% for 3 months straight and then jumps to 25% in month 4, you know you have a problem that needs to be addressed regardless of the effort involved in putting the number together.  And that is the vital item here.  Once you see a negative trend or unusual number, you know that you need to start digging into it.

Also remember that if someone tells you that receivables are exactly 0, be wary.  Something may be more wrong than just a bad number.