Knowing the warning signs: Recognize key performance indicators for your business office

July 1, 2008

Maybe you've been blindsided by a "crisis" in your business office, and only then regretted not spending time to detect the early warning signs.

Key Points

Maybe you've been blindsided by a "crisis" in your business office, and only then regretted not spending time to detect the early warning signs.

But how many physicians have time to monitor every piece of financial data in their dermatology practice?

The good news is that you can monitor critical aspects of your business office's performance without consuming precious hours of clinical time. It starts with keeping a watchful eye on three key performance indicators - days in receivables outstanding, percent of accounts receivable (A/R) more than 120 days old and adjusted collection percentage.

Money in the door

A simple, yet powerful, indicator of performance, days in receivables outstanding (DRO), measures the number of days it takes to get your money in the door. Divide your total current receivables by your average daily charge.

To figure out your average daily charge, divide the previous three months' worth of charges by 90. Keep in mind that in your billing system, refunds you owe to patients or payers offset your receivables; subtract your total current credit balance out of the numerator to capture the most accurate DRO.

Measure your DRO each month and watch for fluctuations, which will alert you to problems in your revenue cycle.

Track outstanding A/R

Ideally, you'd capture payment from patients and payers as you perform services. However, even dermatology practices that optimize time-of-service payments find the majority of their money is outstanding for many weeks after services are rendered. The amount of receivables outstanding - and how old they are - is captured in your aged trial balance.

While keeping watch over your entire aged trial balance is in order, you should track the more than 120-day-old category of A/R like a hawk. While four months may seem like an eternity, having some A/R that old is a reality for all dermatology practices. It's exactly the reason that greater than 120-day-old A/R is a key performance indicator - it signifies problems.

Look at this category of your A/R more closely, and you'll see it is not a pretty picture - denied and pending claims, deadbeat patients, untimely staff follow-up on claims, bankrupt payers, personal injury cases and the like. There are benchmarks for this indicator, but each practice will have many unique factors.

Instead of getting obsessed with the perfect percentage, watch for overall growth in this category - it signals problems ahead.

Fixing those problems will likely require your practice to dedicate more staff resources, and perhaps lawyers, to get payment, if any. The portion of this category attributable to payer actions (or inactions) can be especially depressing when you consider that all states have laws requiring prompt payment for physician services within 60 days of a claim's receipt. Keep an eye on this category to get early warning of collections challenges.

Adjusted collection percentage

The adjusted collection percentage (ACP) indicator is reached by dividing your collections by what you expect to get paid. What you expect to get paid - commonly referred to as adjusted or net charges - is the sum of the anticipated allowances from patients and payers.

This calculation homes in on your business office's performance. The gross collections rate (collections divided by gross charges) is misleading. This just shows the growing divide between your charges and the market's reimbursement. It can even cause you to look in the wrong places for problems. For example, increasing your fee schedule while your payers reduce their reimbursements will cause your gross collection rate to plummet. Meanwhile, your business office may be performing just as well, or just as poorly, as ever.

Keep in mind that these three key indicators will tell you if worrisome problems are occurring, but they won't reveal any details about what's going wrong. For that, you'll need to dig deeper into the indicators themselves - and more importantly, into the accounts that are going awry.

Ms. Woodcock is a professional speaker, trainer and author specializing in medical practice management. She has focused on medical practice operations and revenue cycle management for 15 years. She has authored seven practice management books, including the top-selling Mastering Patient Flow. Ms. Woodcock is a fellow in the American College of Medical Practice Executives and a certified professional coder. She holds a B.A. from Duke University and completed her M.B.A. in healthcare management at the Wharton School of the University of Pennsylvania. For more information, visit http://www.elizabethwoodcock.com/.