Management of Pathology Practices
November 2004
Are You Using Your Monthly Billing And Collection Reports Effectively?
By Al Sirmon, CPA, CEO, Pathology Service Associates, LLC
At the end of each month, your billing company should summarize your month’s activities in a Month-End Report. The Month-End Reports also provide information needed to manage the practice effectively and aid in decision-making.
Benchmarking is an effective way to evaluate your practice’s billing performance. Comparing ratios, which can be calculated using financial data from the Month-End Report, and pre-established benchmarks, allows pathology practices to measure performance on a regular basis.
Listed below are the four most common and useful benchmarks and ratios:
Net Charge to Gross Charge Ratio
This ratio is calculated by dividing Net Charges (the practice’s Gross Charges after Contractual Adjustments agreed upon by the practice and the payor) by Gross Charges, and shows the extent to which the practice is discounting from its standard price for all its payors. This benchmark is best used internally to monitor an individual practice from one year to the next. This indicator can be misleading if used to compare one practice to another practice because practices may have very different fee schedules, or one practice may be in an environment of increased managed care and must offer more discounts than another practice.
Net Collection Ratio
This ratio is calculated by dividing Net Collections (the monies collected by the practice for the services it renders, less amounts refunded to patients and/or payors for overpayments) by Net Charges. Typically, an 88-90% or higher Net Collection Ratio is a good benchmark for this indicator, but can vary depending on the economics and Self-Pay mix in the area. Areas with a strong rural mix tend to fall, in our experience, more in the 85-88% range.
Bad Debt Ratio
This ratio is calculated by dividing Bad Debts by Net Charges. The benchmark for this ratio is 10-15% or less. The Bad Debt Ratio is the inverse of the Net Collection Ratio. If the practice has a bad debt policy, and it is consistently writing bad debt off each month, then the Bad Debt Percentage and Net Collection Percentage, combined, should approximate 100%.
Days in Accounts Receivable
Typically, the benchmark for Medicare is approximately 30 days, and for most other payors, should be 60 days or fewer. This ratio can be calculated by dividing Ending A/R by the Average Daily Charges. Average Daily Charges are calculated by dividing Gross Charges by number of days in a period. This is an overall indication of how long all payors are taking to settle claims. It is also beneficial to compute this ratio for each major payor individually.
When calculating benchmarks, it is best to use several months of data because using a short period of time, e.g., current month, may distort the established benchmarks because collections typically follow charges by 30-90 days. It is also important to review the Net Collection and Bad Debt Ratios on a static pool basis. Reviewing current monthly collections and monthly net charges can produce misleading ratios. Be sure to request reports that present your practice information in a date of service format so that you are able to assess the performance of the collection efforts adequately.
When calculating benchmarks, remember that variances can be caused by a number of factors, including demographic differences, individual practice’s bad debt policy, and payor mix. However, ask questions and investigate any variance that cannot be reasonably explained.
PSA is a leading provider of pathology billing and collection services, practice marketing support, and business support services to independent pathology practices seeking to gain a competitive advantage within their markets. For more information on benchmarks, calculating ratios, and PSA, please contact Randal Sanderson at rsanderson@psapath.com or visit www.psapath.com.