Monitoring Fiscal Vital Signs 10 Key Indicators of Practice Performance

Practitioners need to know the financial position of their practice, but they don’t want to be overloaded with lengthy information reports spewed from their management information systems. On the other hand, merely looking at the cash balance in the checking account or accountant-prepared financial statements won’t paint a complete picture of health.

Most practices prepare financial statements on the cash or income tax basis of accounting. These are useful, but viewed alone, they may mask serious fiscal problems that can run a practice into the ground within six months or less.

The following 10 indicators can be easily gleaned from most basic accounting, billing, and collection systems. They should be compiled on a year-to-date basis with comparable information from the prior fiscal period. They should be reviewed by the owners on a monthly basis.

Income and Expense Variance Report

This report summarizes income and expenses by category and shows increases or decreases with budgeted amounts or prior year-to-date amounts. Your practice manager should already have explanations for accounts with significant variances. This is an early indicator of whether practitioner compensation is going to be up or down from expectations.

Break-even Cash Flow Analysis

This indicator is determined by adding to total budgeted expenses, principal debt payments, and capital expenditures paid out of operating cash and subtracting amortization, depreciation and other non-cash expenditures. Divide this sum by 52 weeks and you have the average weekly collections required to break-even on a cash basis. This is the minimum target for the billing and collections personnel.

The actual collections should be compared to this target on a weekly and monthly basis. If collections are falling below this target immediate steps need to be taken to determine why, and an action plan implemented to correct this or cut expenditures.

Accounts Receivable Aging Summary

This analysis should be prepared on both the date-of-billing and date-of-service basis. If the aging is significantly different on the date of service basis it can indicate delays in the billing process. It can also indicate untimely follow-up on claims denials. If 15{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 20{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} or more of the account balances are more than 100 days old, you need to find out why and take immediate corrective action.

Days Billings in Accounts Receivable

This is commonly calculated by dividing a rolling 12 months of gross charges by 365. The month-end accounts receivable balance is then divided by this number to arrive at days billings in accounts receivable. Compare this average with historical and peer group benchmarks.

With electronic claims submission this number should be significantly lower than historical 45 to 60 days. The average can vary with medical specialty and payer mix but most practices are in the 25 to 35 day range.

Effective Collection Ratio

This is often the most incorrectly calculated and utilized indicator. If utilized properly, it can identify collection problems, fee schedule problems and problem payers. For the most accurate ratio, divide collections for a rolling six-month period by the sum of collections plus adjustments for the same period.
This should be calculated for the practice in total and individually for each major payer. Fluctuations from period to period within the practice should be investigated.

Payer Mix Analysis

This should be prepared on both the gross-charge basis and cash-receipts basis. It tells how much of the practice revenue is derived from specific payers. It is important from a strategic point of view and, coupled with accounts receivable aging, days billing in accounts receivable and the effective collection ratio, it can be significant to evaluating a payer and useful in fee negotiations.

Accounts Payable Aging Analysis

This report, which is an analysis of bills owed, is often underutilized. Practition-ers can be misled by cash in the bank and paid expenses “under control,” only to find out that the practice is 60 days or more behind in paying its bills. This should be compared with prior periods to determine the impact on true earnings.

Provider Productivity Analysis

A comparative year-to-date report of gross charges, adjustments, and collections by provider monitors the contributions each makes to the practice. Some practices use other units of productivity, such as relative value units. It helps identify opportunities for improvement and progress towards organizational and individual goals. It is particularly important if practitioners are paid on a production basis.

Retirement Plan Contribution/Accrual Analysis

Some practices fund their retirement plan contributions monthly throughout the year. Others don’t fund any until the following year. However it is funded, the annual retirement plan contribution should be estimated and accrued monthly. Doctors should be reminded of the status of the annual retirement plan expense and liability for planning purposes. It is an unwelcomed surprise to find out at year-end that there isn’t enough earnings and cash to fund the annual contribution.

Patient Activity Analysis

A comparative report of patient encounters, patient procedures and new and established patient visits identifies trends in patient flow and volume. It can identify needs and opportunities in the areas of patient scheduling, practice marketing and ancillary services.

Utilizing Excel spreadsheets, these performance indicators can be quickly compiled and kept on record for future use. The above reports should be assembled by your practice manager and distributed in advance of monthly financial meetings. Practitioners who utilize these monthly to monitor practice vital signs will make more timely informative decisions and will avoid costly unanticipated surprises.

James B. Calnan, CPA, is partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C., Holyoke, MA Certified Public Accountants and Business Consultants; (413) 536-8510