Yuval Lirov, PhD and Eldad De-Medonsa, PhD
Physical Therapy clinic owners complain about nightmares and headaches because of lack of control and low predictability of theirÂ cash-flow. Without the ability to predict yourÂ cash-flow, you cannot measure or control your profitability.
YourÂ cash-flowÂ fluctuates from month to month because of uneven patient flow and charge differences between various patient conditions. More importantly, yourÂ cash-flowÂ fluctuates because of payers delay and underpay reimbursements.
A diligent and disciplined billing process helps reduce payer delay and underpayments. It starts with the ability to measure your accounts receivable (AR). Â This article shows how to use simple calculations to reliably predict yourÂ cash-flowÂ based on your earlier charges. Once we are able to predict it, we also show a simple and effective path to double your profitability.
Some practice owners approximate their next month payment expectations by averaging previous monthsâ€™ payments. This method is flawed as it ignores the charge fluctuations due to month-to-month differences in patient visits. Â Others extrapolate their next month payments by computing a ratio of payments to charges over previous months and applying it to the current month. This method is flawed too as it ignores month-to-month changes in billing performance.
The method described below avoids this flaw by computing a ratio of payments to charges over previous months and applying it to the current month extrapolation.
1. % AR > 120 – Definition
Insurance companies delay their payments to PT practices. According to the PTB-12 survey, insurance payment delay has the following distribution:
There are two ways to look at this chart:
- When will you get paid for the charges you posted this month?
- How much will you get paid this month for the charges posted in the previous months?
For instance, this month you will get paid 46% of the current month payments, 18% of previous monthâ€™s, 9% of the earlier month, and 6% of 3 months ago. The remaining 21% of 4 months and above will probably not get paid ever.
For this reason, the AR beyond 120 days is a reliable proxy for overall billing performance. Â The Percent AR>120 is the percentage of charges not paid for over 120 days as part the overall AR.
2. How to compute monthly payments?
Ignoring the AR beyond 120 days that is unlikely to get paid, we arrive at a convenient way to predict our payments, given the past history of your charges:
3. Why a Reduction of %AR>120 is Important to Your Bottom Line?
To answer this question, letâ€™s see whatâ€™s sensitivity of your bottom line to billing performance fluctuations. To this end, letâ€™s take a change of 1% in %AR>120 and see what difference it makes to your collections.
1. Calculate sensitivity
2. Calculate the impact of significant performance improvement
4. How Does an improvement on %AR>120 Impact Your Profitability?
Our research shows that industry average profit of a practice is 14.4%.
Returning to the example in the earlier section, the impact of reducing %AR>120 down to 9% is 15% in collection or $9,288 in added revenue. The extra $9,288 is all profit since all expenses were already paid. Therefore, the new monthly profit is a sum of the previous profit ($8805) plus the new addition due to improved billing performance: