The Role of Healthcare Accounting in Managing Accounts Receivable
By Improving Accounting Practices
Healthcare cost in the U.S. has been rising, slapping healthcare facilities with increasingly high amounts of bad debts. Most patients are struggling to pay their medical bills, even as low-cost insurance increases their cost burden with high deductibles. According to recent statistics, more than 90% of patients fail to pay their medical bills fully. This constitutes a considerable loss for providers.
Reports further indicate that an increasing number of patients avoid seeking medical treatment fearing they might not afford the cost of care. Instead, they wait until the condition has advanced. The downside to this is that the more advanced an illness is, the costlier it becomes to treat.
For these reasons, a huge responsibility rests on healthcare facilities to guarantee continued operations amid the challenges posed to their cash flow. This makes healthcare accounting a crucial function in any facility, as the best way to deal with apparent cash flow issues is by stepping up revenue management. Essentially, efficient accounts receivables management can help minimize claim-payment delays and bad debts.
Importance of Healthcare Accounting in Accounts Receivable Management
Accounts receivables (AR) in healthcare represent the outstanding medical bills for services rendered. These are either debts owed by private insurers, patients, or the government. Without proper management, AR days (time taken to collect payment) become lengthier, making it difficult for facilities to meet their financial obligations adequately. Again, as patients take longer to pay their medical bills, the risk of defaulting increases. Statistics show that out of the 30% of patients who leave the hospital without paying, 50% do not pay at all.
However, hand-on accounting provides a clear view of the financial position of a facility at any time, including accounts receivable. Among other things, the team tracks payments from the point of initial appointment until payment, ensuring claims are filed, processed, and collected on time.
Using key metrics, a healthcare accounting team can gain insights into accounts receivables’ performance and take necessary steps to improve. Some of the possible solutions they can implement to counter the challenges may include:
- Reviewing claims thoroughly before submitting – Reports show that inefficient claim processing leads to losses in the tune of billions of dollars. Further, most of the rejected claims are never resubmitted. You can increase the approval rate by stepping up your healthcare accounting, e.g., conducting thorough claim processing to minimize denial.
- Reducing patient defaults – Studies have shown that half of the patients who leave the hospital without paying their bills never pay. While some patients fail to pay due to financial constraints, most of the debts can be recovered if hospitals stepped up their collection efforts. With effective revenue cycle management, the accounts department can expedite claim processing and inform the patients of the deductible amount they should pay promptly. By preparing the patients or their loved ones early, you can increase their chances of paying before leaving the hospital, reducing the likelihood of bad debts.
- Eliminating unnecessary write-offs – Write-offs are inevitable in business. That’s why making a provision for bad debts is essential when preparing financial statements. However, sometimes providers make unnecessary write-offs, especially for small debts. The figures may not be substantial individually, but cumulated, they can make up a sizeable amount of accounts receivables.
With the cost of living ever rising, most people focus on meeting basic needs, pushing medical bills down their list of priorities. As such, hospitals, particularly the accounts team, have to be proactive in debt collection or risk writing off more debts. For instance, you can contact each patient and agree on a payment schedule that favors them. You might be shocked how many people would be willing to clear their medical bills if they were allowed to make small installments.
- Outsourcing accounts receivable – Outsourcing some parts of your accounting function is always beneficial, no matter the size of your business. While an experienced in-house team has immense benefits, maintaining them can be costly. Hence, outsourcing is always an affordable alternative if you don’t have staff experienced in accounts receivable management.
Hiring experts skilled in healthcare accounts receivables management can help you step up your revenue cycle management in many ways. For instance, owing to their industry exposure, they can recommend the best collection processes and solutions that suit your facility, provide you with the right tools to encourage prompt payment by patients, conduct accurate claim processing to hasten payment by insurers, etc.
Why Is It Important to Analyze Healthcare Accounts Receivable to Actual Costs?
Whenever we talk about healthcare accounting or even business accounting in general, the focus is often on sales and profit margins. Accounts receivables are rarely given the importance they deserve. But for an entity that majorly offers credit sales, as is the case with healthcare, accounts receivables are a vital area of accounting, for they give a deeper analysis of the business’s financial health.
For most healthcare providers, accrual accounting is their preferred method of recognizing receipts and payments. Hence, it’s not uncommon to find healthcare facilities posting impressive profits go through perpetual cash flow issues. That’s why analyzing accounts receivables is of utmost importance.
Among other things, it gives you a clear picture of the historical performance of the accounts. You can then use this information to diagnose and address issues, such as high claim rejection or patient default rate and long AR days.
Another equally important accounting procedure is analyzing the accounts receivables to actual costs. This is especially essential for profitability evaluation purposes. For instance, with the help of analytics, you can tell how much you spend in collecting a debt.
Basically, analyzing the receivables helps to optimize collection procedures, resolve cash flow issues, cut down associated costs (like administrative costs, inflation, etc.), and consequently decrease bad debts.
Healthcare Accounts Receivable Analytics
Traditionally, managing accounts has been a complex process and still is. However, technological advancements have brought about a more convenient option of tracking accounts receivables. Thanks to automation, the revenue management cycle (a system that helps track a facility’s revenue from the initial appointment to payment collection) has simplified the process of debt collection significantly.
Moreover, analytics provides vital insights that you can use to improve your procedures and avoid many pitfalls synonymous with manual accounts receivables management. In a nutshell, analytics helps improve your accounts team efficiency in AR management by providing various types of analysis, which consequently resolves cash flow issues.
Example of Key Metrics in Accounts Receivables Management
Several metrics can help you optimize your accounts receivables management. Below are the top three.
- Days in Accounts Receivable (AR)
This refers to the average time (in days) a facility takes to collect payment from the responsible parties (patients, private insurers, or government programs). Computing AR is a two-step process that involves; calculating the average daily charges for, say, six months, then dividing your total accounts receivables by the calculated average daily charges.
For instance, assuming your outstanding accounts receivables are $100,000, and you have charged $500,000 in the past six months (181 days), you can calculate your days in AR as follows.
Average daily charges for the past six months = $500,000 / 181 = $2762
Days in AR = $100,000 / $2762 = 36.2
Essentially, your days in AR tell how efficiently you’re performing. A fully optimized billing function should be 30 days or less. Sixty days and above indicates inefficiency and should be a cause for worry as the longer the debts take to be paid, the more they’re likely to be defaulted.
In our example above, at 36 days in AR, your performance is pretty impressive. But you can optimize to 30 days or less as this assures reliable cash flows.
- Net Collection Rate
Net collection rate measures your effectiveness in the collection. In other words, it shows how much you have collected relative to what you had targeted to collect. To get your net collection rate, you divide collections by the net of gross charges and adjustments, i.e., NCR = Collections / (Gross Charges – Adjustments)
For instance, if your gross charges for May were $100,000, adjustments amounted to $10,000, and you collected $80,000, your net collection should be as follows.
NCR = $80,000 / ($100,000 – $10,000) = 89%.
Generally, the optimal net collection rate should be between 95-100%. In our example, your net collection of 89% indicates poor performance, hence the need to step up your collection.
Note that there are instances where the net collection can exceed 100%. This usually happens if you receive collections from previous months that you hadn’t anticipated. For example, if you had collected $100,000 in May, your NCR would be 111%.
- Denial Rate
This metric represents the percentage of claims denied. You can calculate your denial rate by dividing the total of claims denied by the sum of claims submitted in a specific duration. The lower the rate, the better as denied claims indicate potential cash flow challenges and wasted labor time spent resolving and resubmitting the claims. An ideal denial rate should not exceed 10%, as anything above that indicates poor performance.
In summary, accounting is an integral part of your healthcare business success, especially when it comes to accounts receivable management. With an optimized revenue cycle management system, issues of default by patients and claim denial by insurers arise. This should concern you as you require reliable cash flows to operate smoothly and generally guarantee better patient care and profit margins.
Should you need a solution to monitor your healthcare accounts receivable analytics, talk to us today.