September 14, 2011

A/R Snapshot: Physician Practice Financial Formulas Before ICD-10

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When conversations about the preparations for ICD-10-CM arise, some providers have the same response: “Hold on a minute! How can we prepare for ICD-10 when we don’t know where we stand with ICD-9”?

It’s an obvious question, but one that’s not getting asked too frequently. Still, shouldn’t practices take a fiscal snapshot of internal operations while engaged in ICD-9-CM, which establishes the basis for medical necessity of all services, before diving into ICD-10-CM? It just might be one of the most overlooked common-sense starting points.  In this way, fiscal comparisons can be made following the transition to ICD-10-CM starting on Oct. 1, 2013.

In this day and age, it seems as if financial management of medical practices should be getting simpler. With the preponderance of electronic tools, various software programs and even the Internet, one can practically “Google” quick, effective assistance and problem-solving. But perhaps a return to the basics is in order, especially in preparation for looming changes such as ICD-10-CM.

Fundamentals:

Taking a fresh look at the basics of billing and collections is a good way to re-acquaint yourself with financial formulas that indicate how your practice is performing under ICD-9-CM. Fundamental components of analyzing accounts receivable (A/R, or the amounts due to your practice for services rendered) include being familiar with the following three financial elements of each patient care episode:

  • Charges: full fee amounts for services provided;
  • Adjustments: amounts deducted per contractual obligations, usually with HMOs, PPOs and other payers; and
  • Payments: amounts paid to the practice by patients and payers (receipts).

Collections Ratios:

The collections ratio is a percentage that reveals how much your practice is collecting during a defined time period compared to how much it should be collecting. This ratio is based directly on the practice’s charges.

There are two basic types of collections ratios: gross and net. The gross collections ratio, defined as receipts divided by gross (unadjusted) charges, differs slightly from the net collections ratio, defined as receipts divided by adjusted charges. Those adjustments range from payer participation adjustments a practice is contractually bound to make to various legitimate patient discounts such as charity case adjustments, etc.

Obviously, the more useful of the two aforementioned ratios is the net collections ratio.  Taking into account adjustments mandated by HMOs, PPOs and other insurance plans (plus various patient discounts), this ratio reveals precisely how a practice’s adjusted charges translate into fees. It also provides a more accurate reference point for financial comparisons than the gross collections ratio provides by clearly demonstrating what the practice should be collecting.

Importantly, in this era of economic downturn and managed care pressures (when most actual charges must be adjusted down to net charges), the expected norm for the net collections ratio should be very close to 100 percent. Less than 100 percent net collections might point to problems including payer issues such as (a) slow payers and/or (b) denied or pended claims by payers; as well as internal practice operational issues such as (a) slow claims generation timelines being maintained by a practice’s billing staff, (b) unresolved patient portion or patient due amounts, (c) failure to make mandatory adjustments to patient accounts and/or (d) poor overall A/R management.

Within A/R management, the process used to generate reports in a practice’s billing system (see below for more details) should be flexible enough to allow for the use of various parameters such as net collections year-to-date (YTD) among all patient types, net collections filtered by specific traditional payers (such as Blue Cross/Blue Shield), net collections for HMOs, net collections for self-pay patients, etc. And commonly, the A/R report, once adjusted amounts are taken out, will demonstrate the current collectible A/R as well as amounts “out” 30 days, 60 days, 90 days, 120 days and more than 150 days. From this perspective, these “buckets” can be studied for inherent problems as previously mentioned, using payer issues and internal practice operational issues as criteria.

 


 

Adjustment Ratio:

The adjustment ratio is a simple calculation indicating the degree to which a practice’s gross charges are being adjusted. Ultimately, this reveals how close to realized practice income original gross charges are, plus where a practice’s fee structure is in relation to actual receipts.

Factors influencing this ratio include (a) the number of practice-affiliated HMOs/PPOs and other payers that mandate contractual adjustments and (b) how high or low the current gross fee structure is in relation to the majority of payer fee schedules. This calculation can be performed in a number of ways, the simplest being simply dividing a specific time frame adjustment (i.e. current month or YTD) by the gross unadjusted charges for the same time frame:

Example:

$40,000 Adjustments September 2011 YTD

$100,000 Gross Charges September 2011 YTD

= 4.0 or 40 percent Adjustments

Remember, again, this figure can be studied in a number of ways to provide different perspectives on the same information. For instance, if the practice has a high adjustment ratio but also has a large patient population of self-payers and/or private insurers (generally paying fee-for-service from gross charges), a practice fee structure revision need not take place. However, if the practice has a high adjustment ratio and 75 percent HMO/PPO patients comprising the patient population, a fee schedule analysis might be in order. In the latter case, the gross charges may never be realized fully, resulting in inflated gross charges and adjustments with a mountain of adjustment transactions to be done – and that seriously can overburden an already busy billing staff.

A/R in Time Ratios:

This quick set of calculations reveals how much time, on average, patient accounts are held in A/R status (versus being paid and resolved) once all mandatory adjustments are made. The months-in-A/R and days-in-A/R ratios are useful tools that provide snapshots of overall A/R standings.

For months-in-A/R, first determine from your billing system-generated reports the A/R for the month under study, i.e. September 2011. Then, for the period “YTD September 2011,” add up each month’s A/R figure and divide the sum by nine to yield an average of the A/R through September. Put these figures into the calculation for the A/R ratio:

September 2011 A/R amount

Averaged A/R through September 2011 = Months-in-A/R

Example:

$98,000 A/R for September 2011

$77,500 averaged A/R through September 2011

= 1.26 Months-in-A/R

The above example reveals that the practice’s months-in-A/R ratio is 1.26 months.  Note that this can be done using gross (unadjusted) A/R as well, but if the practice makes contractual adjustments during posting of charges (instead of during posting of payments) based on fee schedules preloaded in the billing system, the net months-in-A/R calculation becomes an even more accurate tool. However, even with unadjusted amounts, this ratio still provides a good reference point – using time – for figuring out how mature the A/R is on average.

Days-in-A/R follows suit, taking the months-in-A/R final calculation and then multiplying that figure by 30.4 (the average number of days in any given month). In the above example, 1.26 months-in-A/R is multiplied by 30.4 for a total of 38.3 days-in-A/R. This figure is reflective of the average number of days any single claim remains in the A/R, or from another perspective of the time it takes any particular claim to liquidate fully and be paid. Therefore, this particular practice has an average of 1.26 months’ worth or 38.3 days’ worth of A/R awaiting final payment or account resolution.

 


 

Reporting:

Detailed reports should be generated on a timely basis each month as well as at the end of each year via the practice billing system. The responsibility for these reports should rest with the billing or office manager. The reports module of the billing system should allow for flexibility in report generation so that both high-level reports as well as detailed listings (down to patient account levels), can be demanded. The reports should be produced in a variety of ways, but physicians often find targeted reports to be most helpful. These can include, for example: (a) A/R aging reports, including current, 30 days, 60 days, 90 days and more than 120 days, with billing staff notes detailing account work; (b) A/R by insurance type (i.e., by payer, including self-pay patients); (c) A/R by suspended, pended or unbilled accounts (this report ensures that no accounts remain hidden during the reporting process); and (d) accounts written off to collections (typically those of more than 120 or 150 days unless the practice is at fault for the untimely filing of claims, etc.).

A few other basic but useful reports are (a) A/R by referring physicians/providers to help spot lucrative as well as perhaps unhealthy referral sources (i.e. referral sources for which high numbers of patient accounts remain uncollected); (b) A/R by service type (i.e. CPT or HCPCS-II codes) to analyze types of services being rendered as well as A/R attached to those services; and (c) A/R month-to-date and year-to-date as compared with last year’s figures, for year-by-year comparisons of practice growth or other changes.

In terms of changes, the transition from ICD-9-CM to ICD-10-CM can be gauged as well.  These reports, when adding filter criteria for, say, the current top 25 ICD-9-CM codes reported on claims, also can provide a focused picture of monies pending or generated related to specific diagnoses. That criterion, that is, the diagnosis code, considered together with other influencing data such as payer type, can demonstrate differences in payments for the same services with the same diagnosis code coming from different payers. Using ICD-9-CM codes among the filtering criteria for fiscal reports can be applied in innumerable ways and can be an eye-opening exercise.

These fundamental but evergreen physician practice formulas provide quick and useful data when monitoring the health of the practice’s A/R. They also can provide a snapshot of the practice as it stands under ICD-9-CM before the big transition to ICD-10-CM.

About the Author

Michael G. Calahan, PA, MBA, is the director of physician services at KForce Healthcare, Inc. Michael has more than 25 years of experience in health care, beginning as a physician assistant with the USN. He has served as an administrator for several physician practices and has enjoyed a varied career in healthcare consulting, being affiliated with Ingenix, CGI, Navigant, PWC and Parente-Randolph. He has authored numerous industry publications and articles in physician, IP/OP/ASC, DMEPOS, ESRD, HHA, ambulance, HIPAA and in Medicare Parts C & D for Medicare Advantage.

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Read 41 times Updated on September 23, 2013
Michael Calahan, PA, MBA

Michael G. Calahan, PA, MBA, is the vice president of hospital and physician compliance for HealthCare Consulting Solutions (HCS). Michael lives and works in the Washington, D.C. metro area, specializing in compliance, revenue cycle management, CDI, and coding/billing in the facility inpatient/outpatient and physician arenas.