Most of the radiologists we know went to medical school to practice medicine, not to become experts in medical billing. At the same time, the effectiveness of the billing staff has such a huge impact on profits that it can't be ignored. This paper offers the basic formulas and benchmarks radiologists need to gauge the performance of their billing operation. It is not a comprehensive study of the various facets of medical billing, nor is it intended to replace expert guidance. However, the concepts presented here will enable radiologists in any practice environment to quickly understand key billing measurements and put them in their proper context.
Practices vary widely on their approach to billing. Some groups have a practice or billing manager who supervises an internal billing staff; others outsource billing activity to a third-party service. We refer to all of these people as the billing staff, whether internal or external. Later on we will look at some issues that relate specifically to billing staff who are practice employees versus those who work for a billing company.
Key Financial Indicators
The Radiology Business Management Association (RBMA) publishes a survey every other year of key financial indicators. We would recommend acquiring a current copy from them. The indicators we discuss below are in accordance with their definitions.
The key indicators are:
- Gross Collection Percentage
- Net Collection Percentage (or Adjusted Collection Percentage)
- Average Days in Accounts Receivable
- Bad Debt Recovered as a Percentage of Collection Write-Offs
Gross Collection Percentage
The Gross Collection Percentage (GCP) is your gross payments (total payments received in a given period) divided by gross charges before refunds and other payments. In other words, it is the amount of money your practice receives in payments compared to what it charges.
Gross Payments /Gross Charges = Gross Collection Percentage
Although people refer to it fairly often, Gross Collection Percentage isn't nearly as valuable a measurement as some of the others unless you are benchmarking internally. This figure may or may not provide a good indication of how well the billing staff is doing, as it can be skewed by the level of the practice's fee schedule.
Take, for example, a radiology practice doing about $10 million in gross charges with gross payments of $3.5 million. Their Gross Collection Percentage is 35%. This compares to the U.S. mean of about 30%, and seems to indicate that the billing staff is doing a good job. For example, let's say the charges that made up the $10 million were a 3X multiple of Medicare during the first year. The following year, the group decided that 3X was too low for a fee structure. They decide to up their fees to a 3.5X multiple of Medicare. The next year, the charges are now larger but the payments remain at $3.5 million. Were the practice to continue using Gross Collection Percentage as the key measurement, it might suddenly discover that it has a huge “problem” with their billing staff -- because the GCP has fallen. The truth is that the billing staff did no better or no worse on the collections than last year, assuming all other things remained constant (contractual adjustments, etc.). The only thing that changed was the fee structure, which was out of the control of the billing staff.
Where GCP is effective, however, is for measuring staff effectiveness if no changes occur in the fee schedule. If the fee schedule is steady, the GCP neutralizes the effects of contracts and write-offs on billing effectiveness.
The GCP is also helpful in determining what amount of money you can expect to collect from your accounts receivable.
The key, then, is to measure the billing staff on what they can affect, which brings us to the best of all indicators, the Net Collection Percentage.
Net Collection Percentage
Net collection percentage (NCP), or as the RBMA refers to it now, the Adjusted Collection Percentage, is calculated by first taking gross charges and subtracting contractual adjustments. Contractual adjustments are the amount the practice has agreed to accept from its carriers. For example, a practice might charge $100 for a certain procedure, but Medicare allows only $40. The contractual adjustment then is $60. The remainder is net charges.
Gross charges - contractual adjustments = net charges
Gross payments - (refunds + returned checks) = net payments
Net payments / net charges = net collection percentage
Net charges are the best indicator of billing staff performance, because the dollar amount it reflects is what the billing staff has the possibility to collect. It is, therefore, the standard for how well they perform their job. The higher the percentage, the better job they are doing. The U.S. median in 2010 for net collection percentage was approximately 81.3% for professional component radiology billing.5 Later we'll discuss the factors that affect NCP and why some degree of variance is acceptable. The chart below shows the effect NCP can have on a practice.
|Annual Net Charges||Net Collection Percentage||Revenue to Group|
|Below Average NCP||$10,000,000||78%||$7,800,000|
|Above Average NCP||$10,000,000||86%||$8,600,000|
Each of the above practices has $10 million in annual net charges (charges minus adjustments), yet there is a substantial difference in the bottom-line of the practice with a 78% net collection compared to the practice that has an 86% net collection percentage. The practice with the 86% NCP had an additional $800,000 in profit at the end of the year.
Again, a few percentage points can make a huge difference. Still, there are a few problems that arise with the NCP calculation as an indicator. One comes when it is reviewed month to month. As payments lag a few months behind charges, the NCP can be inflated or deflated depending on whether charges are rising or falling. If charges are rising, the NCP will be artificially low. If charges are falling, NCP will be artificially high. This shouldn’t discourage anyone from using this indicator, but it will be more valuable if viewed over a three, six, or twelve month period of time.
Days Charges in Accounts Receivable
The Days Charges in Accounts Receivable indicates how well the accounts receivables are being managed. It is calculated by taking the current accounts receivable balance and divides it by the average daily gross charges. The result is then multiplied by the number of days for the given period. We recommend that a six-month period be used.
Total receivables / average daily gross charges = days charges in AR
In the U.S., the mean number of days in accounts receivable is around 40.6 days for professional component billing. Obviously, the lower the number of days in AR, the better off the practice will be because you are getting your money quicker. However, this number must be balanced against your net collection percentage. For example, if a practice has a low net collection percentage of 70% and 40 days in AR, there could be a problem. From the viewpoint of days in AR, everything looks great. However, seen in the context of NCP, the days in AR could be masked by poor AR management, i.e., the billing staff could be sending money to the collection agency too quickly. This would make the days in AR look favorable, but lowers collections.
Bad Debt Recovered as a Percentage of Collection Write-Offs
This final indicator shows how much the collection agency is collecting that is turned over to them. If this number is too high, it may indicate that the billing staff is not going the extra mile to collect the difficult dollars. The percentage of net charges to bad debt is calculated by dividing money recovered by the collection agency during any given period by total given to them during the same period.
Amount Recovered / Collection Agency Write-Offs X 100 = Bad Debt Recovered as a Percentage of Collection Write-Offs
The higher this number, the worse this indicator is. Collection agency fees vary nationally, but range somewhere between 15%-40% of whatever is collected. Compared with the 6%-14% that it costs to collect money via in-house billing or a billing company, it's easy to see the lost revenue. The ranges for the above metric are as follows:
- High: 9.5% or higher
- Medium: 3.6%-9.5%
- Low: 3.6% or lower
The idea behind this metric is that your billing staff is performing so effectively that when the collection agency gets these accounts, they have been worked so thoroughly that they can collect very little. If the collection agency is collecting on one out of ten accounts given to them, then the billing staff should be able to collect this money and save the practice money in fees.
One of the variables in this equation is the abilities of your collection agency. If your collection agency is top-notch, they may skew this number upwards. Similarly, if your collection agency is poor, they may skew this number down. In other words, this indicator assumes your collection agency to be average and, as such, may be deceiving if they are not. Since “average” is the middle of a wide range, odds are your agency is not average. Without some considerable digging to determine how effective your collection agency is, you are left with a possibly deceiving measurement.
Cost to Bill
One of the main questions radiologists ask is what's a reasonable billing expense. According to the RBMA, professional component billing clusters between 7.5% to 11.2%. Global billing clusters around 3.2% to 5.9%.
The key here is value. One percentage point in fee equals one percentage point in net collections percentage. Be careful not to sacrifice quality collections for a low fee. If you save a half of percent on fee, but lose several points in net collections, you are losing money. A higher fee does not always mean better collections though. It is not unusual for practices to both lower their cost of collections and improve their NCP.
Factors Affecting Collections
So how does one determine what the average is and whether your practice is average? After all, averages can be deceiving. A person could have one hand on ice and the other in a hot oven with an average indication of total comfort! There are many factors that affect collections outside of what the billing staff does, but none more than patient mix. If a practice has a lot of self-pay patients (often referred to as "no-pay"), then this will influence collections. The result of a high self-pay mix will be that your net collection percentage is likely to be low.
According to the US Census Bureau, the percentage of Americans without health insurance was 15.4% in 2012. The percent of uninsured also changes by state. In 2010 RBMA AR Survey, the average group reported 6.5% self pay. Remember, though, that the RBMA Survey includes hospital-based groups with an ER as well as private imaging centers, so the RBMA average is skewed down by the private imaging centers.
One of the key things changing in the marketplace is the rise of high deductible health plans that is essentially turning “insured” patients into self pay patients. According to the Kaiser Family Foundation, only 1 in 10 Americans had a high-deductible plan in 2006. In 2013, that number has dramatically risen to over 1 in 3 and continues to grow.
Patient mix is also logically and statistically mapped to the affluence of the area covered. You might have two hospitals in the same city with considerably different patient mixes for their radiology departments. An affluent suburban hospital will have a different patient mix than an intercity trauma center.
If a practice has a lot of commercial insurance, it could affect the number of days in AR. Commercial insurance pays much slower than Medicare and Medicaid but they also tend to pay more. Therefore having a high number of days in AR because of a high content of commercial insurance wouldn't necessarily be a bad thing. Other things that can affect collections are:
- The quality of data being received from the hospital: Poor data takes time (affects days in AR) and human effort (affects net collection percentage) to correct. When a hospital provides the billing staff with accurate data in a timely fashion, collections improve significantly. If the hospital provides the information electronically, it eliminates errors that occur from re-keying, and helps reduce processing errors.
- Effectiveness of billing system: If the billing software or system being used does most things automatically, then it frees people to spend time collecting the difficult money, such as self-pay. In many situations, the billing staff spends an inordinate amount of time doing mundane and low-impact jobs simply because the billing software is archaic or poorly designed.
- Electronic filing: Filing claims electronically can reduce the amount of time it takes to process a claim and receive payment from the insurance companies. In so doing, it lowers the days in AR.
The bottom-line is that there is no easy way to determine the billing staff's effectiveness without an in-depth analysis by a professional. However, the key measurements listed can help a practice determine if it has a potential problem.
How to Evaluate the Practice Billing Staff
Anytime a change is made in the billing staff, it can be a nerve-racking experience. Whoever is managing the billing, whether internal employees or an external firm, holds the financial lifeline of the practice in his or her hands. So changing the billing staff should not be undertaken lightly. Many radiology groups have their own employees doing the billing. It can be effective and rewarding. The advantages include:
- The billing or practice manager has total control. The practice controls hiring, firing and policy changes.
- Many radiologists feel better knowing they are involved in the day-to-day operations of the billing staff.
- The cost of running a billing operation may be lower than hiring an outside firm. Any company that does the billing has to factor in profit in addition to cost recovery. The tradeoff for the lower costs is the time and effort required to manage the operations and staff of the billing office.
However, there are times when this option should not be chosen. Here are some situations where an outside billing service might be a better choice:
- When expensive new or upgraded billing software and systems are required.
- Management of the billing staff detracts from the practice of medicine.
- The radiologists don't want to be do-it-yourselfers.
- The billing staff is ineffective in its collections. Many billing companies can both reduce costs and improve collections.
- The practice has outgrown or outlived its current environment: computer hardware, billing software, offices, office equipment, etc.
- Keeping the status quo is too inefficient, and the expenditures needed to correct them are too expensive.
- The practice might have state-of-the-art technology and excellent staff, but costs have gotten out of control. Hiring an outside billing company offers an opportunity to correct the inefficiencies.
- Having a billing staff is affecting the group's pension plan. According to current guidelines, a functionally equivalent pension plan must be in place for employees and principals alike. Many groups want to have a more aggressive pension plan but can't afford it due to these governmental regulations. Hiring an outside billing company is one way to solve the problem, as your billing office employees now become the billing company’s employees. It's important to see a tax advisor or pension advisor before making any changes in this regard.
How to Evaluate the Billing Company
If a practice can't wholeheartedly agree to the following statements, it might be time for a new billing company:
- The billing company is doing a great job at collecting money.
- The practice's cash flow is seldom/never impacted by the billing company's performance.
- Very few bills are being collected by the collection agency.
- The billing company is completely trustworthy.
- Patients seldom or never complain about the billing service.
- The billing service reports the data the practice needs to see in a timely fashion.
- The fees being paid to the billing service are reasonable for the service it provides.
- The billing service is helpful when it comes to things such as credentialing, fee structures, etc.
Still, it's important to remember that changing billing companies (either to another billing company or to an in-house staff) should not be taken lightly. Typically problems manifest themselves in two general categories: chronic or acute. And although the acute problems draw the most attention, it's the chronic ones that can cause the most damage in the long run, whether in cash flow, profit, patient satisfaction, or the practice's reputation.
How to Maximize Profit
So far we've emphasized the net collection percentage as the key to maximizing profit from a billing perspective, but there are other aspects to maximizing profits, such as setting fees and negotiating with insurance providers. There is no magic formula for making the NCP higher. It just requires doing the hard work, including:
- Calling in advance to make sure the insurance information is correct.
- Calling self-pay accounts to see if the patients have insurance, or putting them on payment plans.
- Working the accounts hard enough so that the collection agency is barely making any money from what the practice gives it.
If the calculations here show that there is a problem, what's the next step? There are actually two ways to go. The cheapest way to address the problem is to get a third-party billing company to do a free analysis of your billing. Most third-party billing companies do this for free. The practice need only provide the appropriate information.
This method is not unlike getting an insurance agent to analyze the practice's insurance coverage needs. There needs to be an understanding that the third party is looking for a mismatch between the practice's needs and its services in hopes of making a sale. So the cost involves hearing a pitch on why the billing service can do a better job than the group's current billing staff. As long as this is clear, the third-party service offers valuable information. And, after seeing the analysis based on your numbers and hearing the pitch, the group might decide that the service is indeed the way to go.
Another option is to hire a consultant, who does essentially the same thing as the billing company does for free. However, the consultant's opinion is supposed to be unbiased and free from agendas. Either of these solutions can validate or invalidate the group's suspicions regarding its billing operation. In either case, the numbers should speak for themselves. No one should be able to give the group information that is unsubstantiated with facts and figures. Above all, the practice must not be afraid to ask the tough questions, and not allow anyone to bury the truth in techno-babble or industry-speak. Radiologists have the right to know exactly where their money is going.
Kyle Tucker is the founder of Dexios Radiology Billing, a radiology-only medical billing company that specializes in accounts receivable management. For copies or reprints of this white paper, please contact Mr. Tucker at 804-378-3543 or email at email@example.com. Dexios will provide a free practice analysis comparing to current RBMA AR Survey numbers for US-based radiology groups, imaging centers and teleradiology companies.