One of the key financial ratios for physician practices is the net collections ratio. On the surface, this number seems straightforward: the amount you actually collected as a percentage of what you were contractually entitled to collect. Yet practices frequently distort this metric through incorrect adjustments, losing visibility into additional revenue they could be collecting.
In busy practices, inconsistencies in training among staff members with respect to adjustment types and allowable amounts are common, and can cause the net collections ratio to be overstated. One consequence of financial metrics that look more favorable than the reality is that practice management may lose the opportunity to act on costly operational issues. A common mistake involves entering the allowable amount and contractual allowance directly from the EOB or ERA. Medical practice staff frequently assume that the insurer is infallible, however the National Health Insurer Report Card published by the American Medical Association suggests otherwise: payer accuracy as low as 62 percent has been reported in previous years, and it’s not difficult to find high volume payers with payment error rates in the 10 to 20 percent range. Allowable amounts should come from an internal fee schedule based on the actual contract, not off the insurer’s remittance advice. Unfortunately, practice employees often do not feel confident calculating payments. Sometimes they bring flawed practices with them from previous employers.
Another common error happens when practice staff classify the difference between charges and the payment received from the insurer as a “contractual allowance”. For example, assume that the practice charges $500 for a procedure and that the negotiated rate with the insurance company for the procedure is $350. However, because the patient owes 20 percent of the allowable amount based on their plan, the insurance company wrote a check for $280. The correct entry would be to record a contractual adjustment of $150 (the difference between the $500 gross charges and the $350 allowable amount per the contract), to post the insurer’s $280 payment, and then bill the patient for $70. However, it is not uncommon for practice staff to make the error of writing off the difference between the $500 charge and the $280 check received to contractual adjustments, causing the practice to lose $70.
In another illustration, a physician performs a surgery which entails multiple procedures. Assume that an insurer contractually owes $700 for the first procedure, and $350 for the second procedure. Instead, the insurer pays $700 for the first procedure, but denies payment for the second procedure. The correct net collections ratio would be the $700 actual payment (numerator) divided by what was contractually owed: $700 for the first procedure plus $350 for the second procedure (denominator). The actual net collections ratio would be $700 divided by $1,050, or 67 percent. This is well below the commonly used benchmarks of 95 percent, and should raise a red flag. However, if we assume that practice staff recorded the allowable based on what the insurance EOB stated, then the net collections ratio would be overstated as 100%.
Having a clear picture of the payments your practice should expect to collect is essential to accurate financial reporting and effective management. A part time CFO can help your practice model contract terms, calculate key ratios, and provide insight into how to make your practice more profitable. Outsourced physican bookkeeping services can provide more consistent, accurate transactions while lowering the costs associated with turnover, training, and supervision. Employee satisfaction may also increase when office staff can focus on patients rather than struggling to interpret insurer payment methodologies.
National Health Insurer Report Card. (2013). American Medical Association. http://www.ama-assn.org/ama/pub/advocacy/topics/administrative-simplification-initiatives/national-health-insurer-report-card.page?
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