Monday Special:17 Financial Terms Every Medical Practice Manager Should Know

I got the idea for this post from an article titled “18 Financial Terms Every Leader Should Know,” by Dan McCarthy at Great Leadership.  I thought it was a great post and created one of my own, borrowing a few good ones from Dan and adding examples for typical scenarios in healthcare.  Oh, and I decided on 17.

1. Cash Basis Accounting.  This was a question on a management test I took a long time ago!  In this method when you pay a bill it is accounted for and when you receive payment, it is accounted for.  Your receivables are recorded when you make deposits and your payables are recorded when you generate your payments online or by checks.  Most physician-owned practices use the cash method of accounting, give the doctors a draw against their earnings, then distribute any additional earnings on a quarterly basis.  To smooth out expenses, any bills that are quarterly (malpractice sometimes is) or annual (profit-sharing usually is), are accounted for to make sure money is not distributed prematurely.

2. Accrual Accounting.  In the accrual method, when you receive a bill, it is accounted for, and when you bill someone, it is accounted for at that time instead of when you are paid.  Your receivables are recorded when you charge the patient and your payables are recorded when you receive a bill.  (I’ve never worked in a practice that used this method of accounting.)

3. Allocation. The process of deciding how each expense should be attributed, whether to the practice at large or to an individual physician.  For example, individual physicians may be allocated expenses for specific staff, or allocated overhead for resources that only they use.

4. Amortized expenses. The costs for assets such as medical equipment and computers, which are depreciated (expensed) over time to reflect their usable life.

5. Cost/benefit analysis. A form of analysis that evaluates whether, over a given time frame, the benefits of the new investment, or the new business opportunity, outweigh the associated costs.  This could be an analysis for a new lab machine, or a new satellite office.

6. Gross Collection Ratio.  The total collections divided by the total charges gives a gross collection ratio, but this number usually is not meaningful as most practices make significant adjustments for contractual rates with payers.

7.  Net Collections Ratio. The total collections divided by the charges less contractual write-offs gives a net collection ratio.  The number should be meaningful, and ideally is not decreasing in this high-deductible, medical bankruptcy, high-unemployment economy.  Collections ratios are the least useful when used for a monthly analysis, and most useful when used to evaluate charges and collections over a year or more.

8. Revenue Cycle. The process of collecting insurance and billing information from the patient, collecting any monies due at the time of service, documenting the medical service provided, translating the service into ICD9 and CPT codes, filing the claim and collecting the contracted amount from the payer.

9.  Equipment lease. A contract to purchase or rent equipment and/or purchase service over a period of time.  The monthly cost includes the purchase price and interest and although the cost over the life of the lease is significantly  more, it allows the practice to avoid a significant cash investment all at one time.

10.  Capital expenses.  The purchase of a piece of equipment, furniture or sometimes software (usually $500 or more) that will be expensed through depreciation.  A capital budget is one that includes all large expenditures the practice anticipates making during the year.

11. Operating expenses. Expenses that occur in operating a business, for example employee salaries, benefits, rents, utilities and marketing costs.   An operating budget is one that includes all expenses incurred in the daily running of the business.

12.  Revenue Budget. A budget that estimates the revenue the practice expects to collect based on physician and ancillary productivity and applying the previous year’s average collection percentage to the anticipated charges.

13. Benchmarks or Key Indicators. Indicators such as cost per RVU (relative value unit),  cost per case in surgery, or days in A/R (accounts receivable) allow practices to compare their performance to the performance of successful practices.

14. Return on investment (ROI). A financial ratio measuring the cash return from an investment relative to its cost.  You may calculate the ROI on an automated appointment reminder system and calculate the cost of the system versus the reduction in no-show appointments over several years.

15. Time value of money. The principle that a dollar received today is worth more than a dollar received at a given point in the future. Even without the effects of inflation, the dollar received today would be worth more because it could be invested immediately, thereby earning additional revenue.  This is important in collections, as getting a partial payment from a patient today may have more value than getting a full payment from a patient in 2 years.

16. Variable Costs. Costs/expenses that are incurred in relation to providing services to patients.  Examples include the cost of medical consumables, patient education materials and merchant services fees for taking credit cards.  As the volume of patients increases, the expenses increase.

17. Fixed Costs.  Costs/expenses that are incurred regularly regardless of patient volumes.  Examples include rent, utilities, and liability insurance.