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Fam Pract Manag. 1998;5(10):16-18

Measuring your collection performance used to be pretty simple: Calculate your collection ratio by dividing payments by gross charges. Now, with a variety of payment arrangements under managed care, it's not so easy. If each health insurance plan pays you using a slightly different formula, calculating a single collection ratio probably won't tell you much. To stay on top of your collections today, you need to climb the mountain of accounting data plan by plan.

Trying to account for managed care

In a fee-for-service (FFS) world, accounting software classifies patients by how they pay (e.g., self-pay, commercial insurance, Medicare and public assistance). This lets practices track their financial performance by payer type.

Things start getting complicated with discounted FFS reimbursement. Some practices post the full fee, the payment and a contractual adjustment to account for the difference. Others post the approved amount rather than the physician's usual fee, so when the payment arrives, no adjustment is required. Both methods, especially the second one, distort the collection ratio.

Things get worse when managed care plans withhold portions of FFS payments and, months later, refund withholds or pay bonuses. Capitated arrangements add more complications, since they pay a fixed amount per member per month. As a result, an overall collection ratio becomes even more difficult to compute — and less useful.

Calculations by plan

The problem, though, is not the collection ratio but how you calculate it. Here's how you can calculate your plan-by-plan collection ratios, with a little help from your computer system.

First, set up a separate plan code (also called payer category, financial class or insurance type) for each plan covering many patients. Give the plan codes descriptive names so you can distinguish among different plans offered by the same company. For the plans covering just a few patients, set up codes to represent different plan types (e.g., Medicare HMOs, miscellaneous capitated HMOs and miscellaneous indemnity plans).

Next, set up payment codes corresponding to each plan code. Use the appropriate payment code when recording payments received from the patient, the plan or other sources for services covered by that plan.

Then, for each plan code, set up adjustment codes to represent contractual adjustments, voluntary adjustments (professional courtesy, discounts and charity care) and bad-debt write-offs.

The next step is for your staff to enter the proper plan code for each patient record. If the patient has more than one plan, use the code representing the primary plan. (At each visit, your staff should verify the patient's plan information.)

Now you're ready to start tracking charges, payments and three types of adjustments by plan. Begin by posting your usual charges (not your discounted charges) for all patients. For those in capitated plans, immediately post a counterbalancing adjustment. This way, you'll know the full value of the services you've provided to patients in each plan, and you won't send bills to patients in capitated plans who don't owe you money.

Post payments according to the plan code the patient had at the time of the charge, not according to the source of the payment. The point is to find out how much you're receiving for patients covered by each plan, regardless of whether some of the payments come from patients or secondary insurers.

Capitation payments and other non-charge-related receipts from plans (such as withhold payments and bonuses) present a special challenge. Although some patient accounting programs have transactions for recording these properly, most don't. If your accounting system can't easily record these payments, keep track of them under separate payment codes in your general ledger system.

Calculating your ratios

With the reports from your patient accounting system showing charges, payments and adjustments by plan code, as well as your general ledger system's revenue reports of all other payments, you'll have enough data to calculate how much each plan is really paying you. (Since the figures in these reports can fluctuate widely from month to month, combine data from three, six or even 12 months to make your calculations more meaningful.) Here's how to do it:

First, for each plan, add all payments you received from the insurer, patients and any secondary insurance plans, including capitation payments, refunded withholds, bonuses and other payments. Then divide the sum by your gross charges (i.e., the full value of your services) for patients in that plan to give you a collection ratio. By comparing the collection ratios for all your plans, you can spot where you should focus your efforts when you renegotiate contracts with insurers.

Continue your analysis by calculating three adjustment ratios for each plan code: contractual adjustments, voluntary adjustments (professional courtesy, discounts and charity care) and bad-debt write-offs. For each plan, divide the sum of the particular adjustments by your gross charges for the period.

Here's what these numbers mean. The contractual adjustment ratio tells you how much the plan is discounting your fees. The voluntary adjustment ratio tells you how much you're discounting your fees. The bad-debt ratio tells you how much of what patients and plans owe you is being written off as uncollectible. (For an example of how these ratios might look for one plan, see “Collections under a microscope.”)

Collections under a microscope

Here's how the collection ratio, contractual adjustment ratio, voluntary adjustment ratio and bad-debt ratio might look for one practice that contracts with ABC Health Plan.

Gross charges for patients in ABC Health Plan:$415,855
Payments received for ABC patients:$328,525
Contractual adjustments for ABC charges:$70,695
Voluntary adjustments for ABC patients:$4,159
Bad-debt write-offs for ABC patients:$12,476
Collection ratio:$328,525/$415,85579 percent
Contractual adjustment ratio:$70,695/$415,85517 percent
Voluntary adjustment ratio:$4,159/$415,8551 percent
Bad-debt ratio:$12,476/$415,8553 percent

Even in the late '90s, the collection ratio still has a lot to tell a practice about its accounting health. Using it is just a bit more complicated these days — like most of the rest of practice.

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Copyright © 1998 by the American Academy of Family Physicians.

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