There are many ways to determine how well your billing service is performing: Revenue generated, the number of patient complaints, accounts receivables turnover, and poor response time from management are but a few. Unfortunately, no single number or statistic will tell you how your billing company is performing. The proper way to evaluate a billing company's performance is with specific financial statistics that, when evaluated simultaneously, clearly reveal what is happening with your practice from a collections effort perspective.

One of the most persistent problems that groups encounter is dealing with a billing company that has adopted the Marginal Approach philosophy. Below is a discussion of this problem.

When reading through all of the statistical comparisons in the following two paragraphs, keep in mind the assumption is very basic revenue is increasing at a much slower rate than procedure volume. This exercise identifies a billing company using the marginal approach to collections. This common practice used by some billing companies maximizes profits of the billing company at the expense of the group's practice revenues. The outcome of the marginal approach is contained in the above charts. Exhibits 1 & 2 show charges and the increasing number of procedures.

Exhibit 1:

Exhibit 2:


Exhibit 1 shows payments are increasing, but at a much slower rate than are charges and procedures. This phenomenon should cause concern because if procedures were flat, collections and physician income would decline. The growth in the practice is masking poor billing performance.

Exhibit 3 substantiates the marginal approach. The average charge per procedure has increased and is most likely due to a shift within the practice to more expensive tests. But the average payment per procedure and the accounts receivable turnover have both declined. Remember, the cost of carrying accounts receivable is borne by the billing company not by the practice. The billing company uses this approach by fixing their profit margin at a predetermined rate. They then adjust or cut costs to achieve the goal. Any ramifications of the cost cutting, such as poor collections, are blamed on the payers or other external factors.

Exhibit 3:


For example, if a billing company is charging 8.5% of collections and wants to achieve a net profit of 15%, then for a procedure potentially worth $40, the billing company would be willing to spend only $2.89 to collect for that procedure. They collect revenues for the practice that are easily obtained and are not costly to collect. They will then write off the more difficult and costly-to-collect dollars. This is evident by the declining accounts receivable turnover ratio without a corresponding increase in receipts.

When evaluating a billing company with declining accounts receivables, the total adjudicated claims will need to be determined to calculate the billing performance. In todays environment of high managed care penetration, it takes more resources and time, not less, to force managed care to abide by the contracts that they have entered into with your practice. This means it takes more work (cost) in order for the billing service to collect each dollar of client revenue.

The Marginal Approach dictates that these billing companies not pursue the harder dollars and only collect the easy ones. The remainder is written off as contractual adjustments. The proper way to approach billing is with a macro approach. This approach looks at the total practice and determines, based on the mix of procedures, payer mix and geographic location, what the practice should generate in total revenue. This revenue number converts to a revenue per procedure - a key number to any billing company since all revenue and costs are measured by procedure. A billing company knows what it costs to collect, on average, each procedure.

Instead of looking at the billing process in micro and determining how much effort will be spent per procedure, the macro approach looks at the practice in aggregate to determine the proper level of collection effort to be applied to all procedures.

This means that, in the macro method, there will be some procedures pursued that the billing company has lost money collecting. Based on this expected revenue and the practice specific factors listed above, a billing company can generate a fee that will ensure the proper collection level and know that they will remain profitable. This radical approach has consistently generated higher levels of collections. This is CMPM's philosophy.

In today's employment market everything must be done to maintain a competitive compensation package to retain and hire new physicians. In that regard, the marginal approach is not a viable long-term strategy for any practice. By leaving dollars on the table, the practice loses its competitive edge when it comes to recruitment, retention of physicians and pursuing other profitable ventures. Let us review your billing reports to determine if your practice is yielding all that it should.

© 2006 Comprehensive Medical Practice Management, Inc. All rights reserved.