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Improve your practice’s cash flow with the right financial strategies.
Competition is increasing, and reimbursements are decreasing. Every dollar counts for most medical practices, yet many physicians have fallen into bad business habits that are costing them money.
Patients and payers have changed their payment expectations, but practices often lag behind, relying on outdated systems and processes to collect money. Budgets lack essential details needed for planning, leading to cash crunches at inopportune times, and safety nets like a line of credit either don’t exist or are inadequate.
“All businesses are leaking cash,” says David Zetter, founder and president of Zetter HealthCare Management Consultants. “There is money being lost in almost every single business, and medical practices are even more at risk because of a whole host of issues. When you can’t explain a variance as to why you deposited $43,000 — yet your billing report says you had $60,000 — either every penny needs to be explained or that is telling you that you have problems and need to figure out where the discrepancies are.”
Practices can minimize their leakage and maximize cash flow by setting up detailed financial systems, understanding their payer contracts and managing costs.
Create a solid financial system
The first step to improving a practice’s cash flow is making sure a system exists to track and manage it.
“I think the No. 1 mistake that I’ve seen is people just not actually having a cash flow management system at all,” says Akash Madiah, chief financial officer of the Medical Group Management Association. “And when I say system, it’s the process around it and understanding what the future cash flow needs are going to be for the practice. It all starts with the budgeting process.”
Practices need a thorough understanding of what’s going to happen in the practice in the next year, including when people get paid, whether it’s salary or bonuses and if investments in medical equipment are needed, as well as all the regular costs that need to be accounted for.
“It’s different from a P&L forecast because it’s the actual cash you need out the door that you’re going to need to make,” says Madiah. The forecast needs to also consider expected patient volumes. “Are you going to have a lot more patient visits during flu season? It’s just understanding all those nuances of your practice that is really key for any kind of forecasting ability.”
The system needs to also include a commitment to communicating with patients what their financial responsibilities are before the appointment and then collecting the money due while they are in the office.
“What you have to do is let the patient know upfront — and we advocate for two days out — that they pay not only the copay” but also “whatever their coinsurance may be” by doing an estimate when you verify the insurance, says Derick D. Perkins, a managing partner at Metis Advisors LLC. “And more important than that, you also set up the outstanding balances from previous visits.”
Most offices send letters about balances due to patients but don’t always realize that same patient might be coming in for a visit that week. “That’s your opportunity to set them up on a realistic payment plan,” Perkins adds. “One of the things that most organizations do not do well is they don’t have a firm policy and standards on how to set the plan up for the front office staff.”
To make sure patients can pay the practice, offer financing options. More patients are relying on high-deductible plans, putting more of the burden for payment on them rather than a payer. There are third-party organizations that work with doctors to help patients pay their bills. Patients with financial challenges may rack up thousands of dollars in care, making it unrealistic to pay the practice $25 a month for decades. Instead, they can finance it, and the office collects 85%-90% of the money upfront.
A good cash flow system should also focus on collecting money that’s past due. Perkins says to be careful not to focus exclusively on the largest bills when trying to collect. “Sometimes you never get down to the lower dollar balances,” he says. “Sometimes they can be $100, sometimes it can be $50, but those are the ones that are the most collectible in terms of monthly or one-time payments.”
In some cases, Perkins says it might be more expedient to offer a patient a settlement with a 15%-20% discount just to get cash into the practice rather than spending months trying to collect the full amount. It’s not usually hard to figure out who to offer the deal to.
“You can see the difference in the ones who really care about their credit or the ones that typically want to pay their bills because they are going to offer you something,” says Perkins. “They will take advantage of it and pay something versus the one who is never going to pay. You can see balances in the system from previous visits, and that’s why it’s so important to try to collect as much as you can upfront when they first come in because when that person hasn’t paid their previous balance, the chances of them paying even with the discount are pretty slim.”
Practices need to spend time understanding their payer contracts because the reimbursements are where the revenue cycle starts. Having copies of the contracts with reimbursement rates allows practices to project revenue based on past patient volume and current procedural terminology codes and to double-check that actual reimbursements match with the contracted rates.
Perkins says practices should track key metrics for each payer. For example, if certain procedures are being denied but then paid on appeal 90% of the time, that’s something that can be discussed at the next negotiation. Eliminating denials will boost cash flow by speeding reimbursement from the payer and freeing staff time for other activities.
Knowing the data can also boost a practice’s future reimbursement rate. “Not everyone can really negotiate in certain markets — what you get offered from certain payers is what you are going to get — but you have to have the analytics,” says Perkins. “When you sit down to let them know you want to get paid this amount, at least have the numbers available. Analytics is the key going forward because it reveals a lot more about what’s going on in your accounts receivable and what you are trying to get to.”
With detailed reporting, instead of looking at data on a 30- or 60-day lag, trends can be identified that might show a dramatic drop-off midmonth from a particular payer, buying time to reallocate resources to focus on another payer or making other financial moves, says Perkins.
In addition to payers, track vendors for their efficiency and how they affect your cash flow. For example, many practices use a vendor for collections but don’t always pay much attention to its performance. Perkins suggests using a second placement for debts the first agency didn’t collect on — to not just collect as much money as possible but also to measure the effectiveness of the first agency.
“If the second agency can pick up a good percentage, that means your first agency is probably not doing a good job collecting,” says Perkins.
The quickest way to boost cash flow is to cut costs, but for medical practices, most costs are usually labor.
Madiah says practices need to understand the costs of physicians, nurses and office staff and be willing to make adjustments based on forecasts. “It really starts with understanding your volume that’s coming in the door,” he says. “When you know your volume, you know the right staffing levels to have.”
A common mistake is having the same staffing all year when volume is cyclical. In the down months, hours should be reduced.
Whether to lease or buy equipment is another consideration. Leasing might appear to cost a practice more over the life of the machine, but certain variables need taken into account. “Is this equipment something that’s going to need a lot of maintenance over the years? If so, leasing is always a good option because someone else will take care of that,’ says Madiah. “If you buy it, it’s yours, and you have to commit the time and money to fixing it.”
Likewise, buying an office space for the practice instead of leasing may make sense in some cases, but is managing building maintenance cost-effective for the staff?
“When you have a lease, you might have a landlord that will build out the space and offer you incentives to rent,” says Madiah. “If you own the space, are you going to have the patient volumes to service the building? And is that really what you want to be spending your time doing?”
Improving cash flow doesn’t have to be complicated, but setting up the right system can be the difference between success and failure.
“It’s all about setting up proactive revenue cycle policies and being able to predict what your cash flow is and being proactive with the entire process,” says Zetter. “Most revenue cycle management has been and still is reactive — we chase money. And businesses that chase money don’t make money, and they don’t stay in business.”