ADVISORY
PUBLICATIONS
One Dozen Essential
Medical Practice Financial
Management Ratios
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Table of Contents
The 12 Ratios ................................................................. 2
Benchmarking Against National Averages ..................... 4
NAHC National A/R Statistics by Specialty ..................... 5
How Well Does Your A/R Process Work? ....................... 5
Sample Aged Receivables Report (ARR) ........................ 7
Strengthen Your Collection Process ............................... 8
Benchmark Your Overhead and Profit, too ..................... 9
How Did You Compare to Your Peers? .......................... 9
This publication is designed to provide accurate and authoritative information on the subject covered. It
is sold with the understanding that the publisher is not engaged in rendering legal service. If legal advice
is required, the services of a competent professional should be sought.
©Advisory Publications, 2003.
One Dozen Essential Medical Practice Financial Management Ratios
The 12 Ratios
E
2. Net collection ratio. Due to contractual
ven though information alone doesn’t do any
thing, it provides the primary tools for monitoring your practice’s performance and diagnosing problems that impair your productivity. So
this report will examine ways to identify problems
and come up with solutions that can improve practice revenue.
adjustments, you are undoubtedly collecting
less than ever of what you charge — making it
more important than ever to actually collect all
of what you are legally entitled to receive. This
measure incorporates your contractual disallowances, telling how much of what you’ve
agreed to be paid you actually receive.
Before we explore the amounts due you — your accounts receivable (A/R) — remember the old business adage, “You can’t manage what you can’t measure.” You can’t make changes and improve performance until you have accurate, relevant measures to
analyze. Running your business without them is like
driving at night with the dashboard lights off — you
might arrive at your goal safely but, then again, you
might go over a cliff.
Be careful here: While your business system
presumably allows you to post the disallowances reported with each third-party payor’s
reimbursement, don’t simply assume that
whatever is not paid is a disallowance.
MCOs and other payors (including Medicare
and the Blues) are notorious for disallowing
more than they should. Be sure your staff
knows your payment rights well enough to
post only acknowledged disallowances and
to dispute all others.
The twelve common management ratios that follow
can — along with your trusty profit and loss statement — form the basis of a practice “report card.”
As we continue to hammer home, brief, regular reporting helps physicians and their administrators/
managers develop a fuller understanding of what’s
happening in one of the practice’s most critical arenas.
Total collections
________________
Total gross charges
3. Overhead ratio. All business owners
want to know how much of the revenue it
takes to keep their doors open. Most practice
and national benchmark measures uniformly
exclude physician compensation from the
expense ratio calculation. But that consistency disappears when discussing nonphysician practitioners.
These ratios, supplied by practice finance specialist
Max Reiboldt, routinely turn up in industry benchmark data. We reproduce each formula with a brief description of how it might prove useful to your practice.
1. Gross collections ratio. This basic
ratio simply shows how much of what you bill
for you actually receive. By itself, it tells little;
but compare it with the net collection ratio
below to help determine whether your fees are
too high (or low).
Some organizations consider nurse midwives,
physician assistants and similar clinical extenders as support staff and include them with
practice overhead. Others exclude non-physician practitioner salaries from the overhead
calculation because they’re “providers” (of
direct healthcare services).
Total collections
________________
Total gross charges
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One Dozen Essential Medical Practice Financial Management Ratios
6. Days in accounts receivable. Track-
We prefer viewing non-physician practitioners
as employee staff who free physicians for
greater productivity. Following that logic,
include their salaries in the overhead calculation. Whichever way you choose, make sure
you calculate your practice ratio according to
the same method used by any benchmark.
Doing so permits a direct comparison of your
data to the national statistics.
ing days in A/R helps monitor billing and
collections. The greater this number becomes,
the longer it takes insurance plans and patients
to pay you. You absolutely must find out why
that’s happening.
Outstanding accounts receivable
___________________________
Average adjusted charges per day
Total operating expenses
(minus provider salaries and benefits)
______________________________
Total collections
7. Accounts receivable per FTE
physician. This ratio calculates an average
amount owed for each physician’s work.
Totaling the receivables for each doctor and
comparing that amount with the group’s
average may expose poor coding skills or a
lackadaisical effort at keeping up with paperwork: “Dirty” and/or tardy claims will virtually always take longer to process than do
clean ones.
4. Individual category expense ratio.
Lumping all expenses together often camouflages where a practice overspends. This ratio
isolates how much you spend on individual
expenses. You must fully understand the impact
of such individual expenses as personnel,
office facilities and lab and clinical supplies.
Outstanding accounts receivable
____________________________
Number FTE physicians in practice
Individual expense (by category)
________________________
Total collections
8. Staff ratio. Make sure you handle non-
5. Average (adjusted) revenue per
day. Comparing this ratio to your daily
physician practitioners consistently when
calculating this ratio. As mentioned earlier, we
prefer considering such physician extenders as
employees, making them part of the numerator
for this ratio.
charges shows you if each day’s work — at
least in terms of revenue production — is
above or below average. In effect, it shows how
busy you are.
Total FTE employees
_________________
Total FTE providers
Many factors, including surgery schedules and
the number of physicians working a day’s
sessions, greatly affect daily charges. Investigate the reasons behind any significant variance. If your adjusted charges per day increases by more than inflation over time, it
suggests your practice is growing.
9. Average revenue per patient. This
measure and the following one obviously
interrelate. Your target: high revenue per
patient combined with low cost per patient.
Adjusted charges for last 3 months
____________________________
Number of business days in last 3 months
Total monthly collections
_____________________
Total monthly patient visits
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One Dozen Essential Medical Practice Financial Management Ratios
10. Average cost per patient. As with all
end of the spectrum, decide whether you want
to put up with a particularly hard-to-work-with
plan if you don’t generate much revenue from it.
expense ratios, make sure you consistently
handle how you account for physician and
non-physician practitioners.
You could also calculate similar payor ratios
replacing receipts with adjusted charges. That
ratio would tell what you should receive from
various payors. If what you actually collect
differs greatly from what you should collect,
investigate problems with your collection
activity and/or the payor.
Total expenses per month
_____________________
Total monthly patient visits
11. Laboratory expense ratio. If you
incorporate laboratory or other ancillary
services into your practice, track whether such
ancillaries continue to prove worthwhile. Use a
similar ratio for all “add-on” services.
Individual payor receipts
____________________
Total receipts
The value of comparing your A/R and collection percentages performance to national averages is that doing so gives you a sense of what is truly achievable.
When comparing data, managers and advisors routinely zero in on A/R over a period of months as a
handy way to measure a practice’s progress and to
compare one practice with another.
Total monthly lab expense
_________________________________
Monthly net charges for lab-related CPT codes
12. Payor mix ratios. Not all insurers are of
equal value to your practice. Calculating this
ratio for each contract shows how the individual plan or company contributes to your
overall financial success.
One good source of national data: the National Association of Healthcare Consultants’ (NAHC) annual
statistical report, Survey of Medical and Dental Income and Expense Averages.
If one or two companies dominate this statistic, make sure you develop the best possible
working relationship with them. At the other
Benchmarking Against National Averages
The information comes from data submitted by
members of the NAHC and the cooperating Society
of Medical-Dental Management Consultants. These
consultants tabulate the figures directly from their
medical practice clients’ annual accounting reports.
www.healthcon.org or www.smdmc.org; it costs $500
for members and $1,500 for non-members.)
NAHC’s report is particularly valuable because the
organization draws information from small and midsized practices that are typically above average in financial and professional success. Those practices see
fit to hire good consultants on a continuing basis. They
rely on regular outside advice, including experts who
help them conduct the kind of analyses we describe in
this book — and then help implement changes necessary to continually improve practice performance.
The table on the next page reports the average number of months’ charges in A/R for the 34 most representative specialties, using data gathered through the
year 2001 (2002 figures won’t be available until well
into the year 2003, of course).
The entire report encompasses highly-detailed data
from 56 medical and dental specialties, including
breakdowns by geographic region and solo or group
operations. (You can order the full report online at
We’re sure you will want to compare your practice’s
figure with the most current data in our table to see
how you are faring. But be sure to recognize how the
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One Dozen Essential Medical Practice Financial Management Ratios
NAHC National A/R Statistics by Specialty
(Monthly charges in accounts receivable)
Neurosurgery (42) ............................................................. 1.4
Ob/Gyn (395 ..................................................................... 1.8
Ophthalmology — Dispensing (132) ................................ 1.3
Ophthalmology — Non-dispensing (111) ......................... 1.9
Orthopedics (322) ............................................................. 1.7
ENT (101) .......................................................................... 1.4
Pathology (44) .................................................................. 2.1
Pediatrics (375) ................................................................. 1.5
Physician Medicine & Rehab (36) ..................................... 1.0
Plastic Surgery (69) .......................................................... 1.9
Pulmonology (56) ............................................................. 1.5
Radiology (248) ................................................................ 2.7
Rheumatology (17) ........................................................... 1.6
Vascular Surgery (12) ........................................................ 1.3
Thoracic Surgery (18) ....................................................... 1.9
Urology (176) .................................................................... 1.6
(The figures in the parentheses are the number of physicians
of that specialty included in the survey.)
Allergy/Immunology (147) ............................................... 2.2
Anesthesiology (226) ........................................................ 1.9
Anesthesiology/CRNA (22) ............................................... 2.1
Cardiology — Invasive (116 ............................................. 1.6
Cardiology — Non-invasive (17) ....................................... 0.9
Dermatology (157) ............................................................ 1.6
Emergency Medicine (139) ............................................... 2.9
Endocrinology (13) ........................................................... 3.3
Family Practice — with obstetrics (204) ........................... 1.6
Family Practice — w/o obstetrics (397) ............................... 1.8
Gastroenterology (155) ..................................................... 1.5
Internal Medicine (373) ..................................................... 1.9
General Surgery (251) ....................................................... 2.2
Gynecology — w/o OB (29 ............................................... 1.9
Hematology/Oncology (60) ............................................. 3.1
Infectious Disease (18) ..................................................... 2.1
Nephrology (41) ................................................................ 2.2
Neurology (104) ................................................................ 2.8
figure was calculated so you’ll be comparing apples
to apples.
your outstanding A/R by the total of the last
12 complete months’ charges, then multiply
that result by 12.
It bears repeating that if your figure is considerably
higher than the reported mean, it suggests that your
staff is not “turning over” receivables quickly
enough. Perhaps they are leaving old receivables on
the books too long before seeking payment, referring
them to an agency — or writing them off. The best
way to turn them over, of course, is to collect them
in a process that systematically contacts both third
parties and patients to pay what they owe as soon as
those amounts become known.
Determine where you stand
The table shows the A/R dollars in relation to number of months gross charges. Practices commonly
use gross charges (before any write-downs) to determine this ratio, and so do the Association statistics.
Our table reports this dollar amount as each
specialty’s mean; thus, half of the practices reporting
had amounts greater than the mean figure and half
had amounts less than that.
➢ To determine your practice’s figure, divide
How Well Does Your A/R Process Work?
To start your own financial analysis, use your computerized billing system’s A/R reports to find out if
collectible balances are growing or shrinking, and
how long it takes (on average) to get paid. Chart at
least a year’s worth of “ending A/R” amounts from
your monthly closing financial reports and note
whether the overall total is climbing, descending or
generally staying level.
Climbing A/R often indicates staff not keeping current
collecting and writing off account balances. Dig deeper
to find out what’s going on: Are you generating more
revenue? Did you recently increase your fees? Did you
add a new provider? Have you lost a key staffer?
Descending A/R shows the opposite: Has patient
volume dropped off? Have staff been catching up on
5
One Dozen Essential Medical Practice Financial Management Ratios
Remember: Lower is better for cash flow, so if your
number seems high or shows an upward trend, dig
deeper to isolate the cause.
(6) Are your aged receivables distributed relatively
equally among the physicians in your group? If
not, investigate whether any of your members are
undermining the collection process.
A “no” reply to any of the preceding questions is
cause for concern. It behooves you to find out why
and possibly take immediate action. If there’s a problem, find out if it’s at your end (internal) or at the
insurer’s end (external).
Key questions
Identifying trends
old accounts? Comparing your practice’s “days in
A/R” number to national or regional averages, or
against top performers in your specialty, helps pinpoint where you stand competitively. But the most
useful comparison is against yourself: Continue to
monitor days in A/R monthly so you can track trends.
For example, a change in your receivables by payor
class may indicate that a certain insurer has not received your claims or that internal problems are
causing it to delay payment. Internal problems can
range from not obtaining adequate billing information up front to ineffective collection controls.
Claims may be backlogged, or perhaps your office is
failing to submit clean claims. Perhaps a new staffer
is simply making mistakes.
As the A/R reports generated by your billing system
reveal so much about your practice’s financial performance, good collections depend on carefully overseeing your accounts status. So develop an ongoing process that includes analyzing them afresh; ask these
six questions about your receivables every month:
(1) Is your A/R total in the normal range of less
than three months’ total charges? Total charges
means accumulated gross charges, and total
receivables means as put on the books before
reducing for contractual disallowances.
Externally, perhaps the payor is experiencing a financial crunch leading to inappropriate denials and
adjustments, a slowdown in payments, or both. Or if
one physician in your group shows an out-of-norm
increase in receivables, see which insurance plans
are primarily involved. Perhaps a plan has not recognized your member as a group provider. If so, act
promptly to correct the situation.
(2) Are your aged accounts (again, gross) by
payor class consistent? For instance, if 20% of
your A/R are usually due from Blue Cross and
the figure rises to 35%, be sure to investigate
why it changed so much so quickly.
(3) Is your adjustment ratio for contractual disallowances stable? If your contracts generally
pay 75% of your gross charges, expect adjustments to be in the 25% range; if they go up to
35% in a particular month, find out why.
If your over-120 days aged figure totals more than
20%, or your collection ratio amounts to less than
90%, your office’s claims processing routines are
likely at fault. Or one payor may be mishandling
your claims, depressing the ratios. At any rate, clear
the matter up to improve your cash flow and reduce
the risk of non-payment.
(4) Is your adjusted collection ratio between 90%
and 95%? Determine this figure by dividing
net charges (after contractual write-offs) by
gross charges for the same period.
Start with the specific ratios described earlier, but go
on to develop your own figures reflecting billing personnel performance. Then, from the in-house figures, set benchmarks for improvement with target
dates for reaching them. Keep on asking the six
questions each month, with ever better ratios demanding “yes” answers.
(5) Is your aged receivable 120-day figure less
than 20% of your total accounts receivable?
By asking this question, you evaluate the
billing department’s performance in managing
your older accounts, an important source of
income if pursued properly.
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One Dozen Essential Medical Practice Financial Management Ratios
Tracking key factors over time lets you develop a
quality assurance program. You can examine trends
and know how they impact the practice, and you’ll
be better equipped to make wise decisions. Moreover, you can set and monitor standards for your
staff’s handling of billing and collection functions.
That’s the way to continually improve your collections performance and ensure that you don’t leave
any potential revenue on the table.
Applying your internal data
How do your accounts age?
An aged receivables report (ARR) presents a series
of pages listing each open account by patient name
and amount owed, with the listings separated according to each account’s age – those “buckets” we mentioned earlier on. Current accounts under 30 days old
need not be individually listed, but other accounts
are carried in 30- to 60-day, 60- to 90-day groupings,
and so on. Add up the dollar amounts in each grouping and report each category’s total as a percentage
of the overall total.
Your computer system probably spits out an “aged
receivables report” each month with monotonous
regularity. Even in moderate-sized practices, it runs
to ten or more pages of line after line — enough to
blunt your interest in its data. (And if you still don’t
run such data on computer, creating the report may
seem too overwhelming for what you regard as only
slightly useful information.)
Your billing system almost certainly reports A/R by
“aging buckets” to show how much of the outstanding balance is 30, 60, 120 or more days old. Average
practices show at least 40% of A/R in the current
(<30 days) bucket, with each subsequent month declining as balances are collected and adjusted.
If you discover a 120-day balance higher than your
60-day and 90-day balances, the 120-day bucket may
contain balances too old to collect. Have your staff
clean up old accounts by pursuing the old balances,
sending them to a collection agency — or writing
them off.
The ARR is much more useful than you may think,
for it enables you to evaluate collection performance
as well as make intelligent decisions about each delinquent account. Our sample below shows a case in
point that illustrates how useful such reporting can
be if your practice has problems. If, for example, the
total dollar amount in the “over 120 days” category
increased from one report to the next, you ought to
know why. Similarly, an increase in older receivables
is distressing enough to merit special attention.
Continued rising receivables or delays in payment
call for increased attention, both to your staff’s work
and to the payor’s situation. Explore the reason for
the problem, determine the solution and act quickly.
By doing so, staff members know you mean business. Ultimately, their morale will lift as a result of
better billing operations and patient satisfaction.
Sample Aged Receivables Report (ARR)
Your computer system keeps track of the money each patient and payor owes you. It stores the details in individual patient
accounts, but accumulates all those balances and presents them to you in summary form based on their “age” — that is, the
time since the date of service.
An aged accounts receivable report tells you how much money you have yet to collect for services you rendered this month,
last month, and for each preceding month. In most systems, the last “aging bucket” only tells you that its balances exceed, say,
120 days — the actual dates of service usually go back for years.
In the example below, this physician’s staff collects balances fairly smoothly, as indicated by the declining balances month to
month. But notice how balances over 120 days old have grown: Apparently the collection department has allowed old balances
to languish uncollected.
Balance:
% of A/R:
Current
30 - 60 Days
60 - 90 Days
90 - 120 Days
> 120 Days
$28,432.50
29.51%
$19,345.12
20.07%
$9,435.16
9.79%
$5,905.78
6.13%
$33,245.98
34.50%
7
Total
$96,364.54
100.00%
One Dozen Essential Medical Practice Financial Management Ratios
Strengthen Your Collection Process
If your practice is typical, third-party reimbursement
for physician services comprises your main source of
revenue. Therefore, work to manage the complexities
of your overall reimbursement by:
trends in these key areas:
• Reasons for denials
• Collection rate by individual carrier
• Days in collection by payor class
Establishing defined billing procedures
• Contractual allowances
Analyzing patterns in actual reimbursement
• Bad debt write-offs
Monitoring staff performance
How you approach each of these challenges is important to maintaining strong (and steadily improving) collections, so let’s consider each.
• A/R aging by third-party payor
• Internal billing errors
(3) Monitor performance. The third component
starts with an awareness of progress or lack of
progress. Ongoing monitoring of billing
operations detects if the billing department
quality has slipped.
(1) Establish procedures. The first step begins
with understanding why you need a process
and why it involves the entire staff. Your
billing and collection department — whether
one or two staffers or a more elaborate setup
— must perform well to insure satisfactory
cash flow. That takes teamwork.
For example, does it take longer to submit
initial claims, or are more claims denied due to
error? Meantime, monitoring the performance
of payors detects if response time slipped or
payment trends change.
If everyone does his/her assigned part and
supports each other, you’ll improve collections
and financial performance; reduce billing
errors, denials and uncollectibles; streamline
administration; elevate staff satisfaction; and
improve patient communications and relations.
Line-by-line review
So study ARR totals. Compare them to the prior year
and to the months before, paying special attention to
the percentage of each category to the whole. It’s
your early warning sign of trends about both patients’ and insurers’ payment patterns — and it keys
you in to how well your staff is performing their collection duties.
(2) Analyze patterns. With good procedures, you
can analyze financial results. When payments
arrive, your staff must properly check the
claims as filed, examine denied charges and
identify what may or may not be legitimate.
Insurers make mistakes, so your staff must
firmly protect your interest by holding the
payor accountable to perform according to
contract. Review the insurer’s explanations of
benefits (EOBs) that accompany your reimbursements, closely examining payments and
denials. Monitor the situation by spotting
As a working tool, the report gives your collections
employee a specific list for applying his/her followup routines. The employee can select an age category
and pursue each listed patient, ideally without interruption, before moving on to the next category. And
you can use it to review the accounts individually
with collections employees — keeping them on their
toes in handling them.
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One Dozen Essential Medical Practice Financial Management Ratios
Benchmark Your Overhead and Profit, too
It’s useful, too, to see how your practice’s overhead
and profitability stack up against benchmarks. Here’s
that data from the NAHC/SMD 2002 Report, described
back on page 4 for 20 representative specialties. We
consider the NAHC/SMD statistics quite representative of more successful, but smaller, practices.
How Did You Compare to Your Peers?
Allergy/Immunology (147)
Receipts
from 2000
$710,317
-15.90%
Hematology/Oncology (60)
Overhead ratio
53.00%
Profit
Receipts
$334,149
-26.00%
$2,277,186
from 2000
15.00%
Anesthesiology (226)
Receipts
from 2000
$530,994
-8.10%
from 2000
$412,132
-38.60%
36.30%
Profit
Receipts
$338,486
-12.50%
from 2000
from 2000
$910,677
15.90%
23.90%
Profit
Receipts
$313,583
-1.30%
from 2000
from 2000
$736,915
3.10%
39.60%
Receipts
$550,160
17.90%
from 2000
$779,829
6.90%
Receipts
48.20%
$380,542
-3.30%
Receipts
Receipts
$381,670
-1.70%
from 2000
Overhead ratio
49.70%
Profit
$633,969
-7.30%
Receipts
$392,500
-5.30%
from 2000
Overhead ratio
Profit
$287,574
6.20%
Overhead ratio
57.90%
Profit
$311,380
14.80%
Overhead ratio
56.40%
Profit
$276,157
-15.30%
62.00%
$641,350
4.50%
Receipts
$433,249
12.20%
Receipts
$144,779
-0.10%
from 2000
$535,366
13.60%
Overhead ratio
45.90%
Profit
$438,360
1.40%
$700,388
17.40%
Overhead ratio
52.30%
Profit
$334,225
14.30%
Pediatrics (375)
Overhead ratio
39.60%
Profit
Receipts
$387,557
4.30%
from 2000
$458,310
12.30%
Overhead ratio
59.50%
Profit
$185,662
8.50%
Radiology (248)
Overhead ratio
58.20%
Profit
Receipts
$181,175
1.40%
from 2000
General Surgery (251)
Receipts
$809,796
0.70%
Otolaryngology (101)
Profit
Internal Medicine (373)
from 2000
$739,050
9.90%
Profit
Gastroenterology (155)
from 2000
Overhead ratio
53.40%
Ophthalmology — Non-dispensing (111)
Overhead ratio
Family Practice — without obstetrics (397)
from 2000
Profit
$235,314
-11.20%
Orthopedics (322)
Receipts
from 2000
$617,185
7.30%
Profit
Dermatology (157)
from 2000
Overhead ratio
53.60%
Ophthalmology — Dispensing (132)
Overhead ratio
Cardiology — Non-invasive (28)
Receipts
$506,682
3.00%
Ob/Gyn (396)
Overhead ratio
Cardiology — Invasive (116)
Receipts
Profit
$584,690
4.20%
Neurology (104)
Overhead ratio
Anesthesiology/CRNA (22)
Receipts
Overhead ratio
74.30%
$707,360
7.10%
Overhead ratio
26.00%
Profit
$523,403
4.10%
Urology (176)
Overhead ratio
41.20%
Profit
Receipts
$314,645
16.40%
from 2000
$765,145
9.30%
Overhead ratio
43.70%
Profit
$430,412
18.90%
The data in this chart comes from the 2002 report (on 2001 data) produced by the Joint Statistics Program of the National Association of
Healthcare Consultants and the Society of Medical-Dental Consultants. It contains average revenue, overhead ratio and profit (receipts minus
non-physician expenses, not W-2 compensation) for selected specialties. The number in parentheses behind each specialty name is the number of practices responding in that specialty.
9