Running a medical practice in the US goes far beyond the doctor-patient interaction. In fact, doctors have to manage payrolls, insurance reimbursements, operating expenses, equipment costs, taxes, cash flow etc. If doctors do not get the financial picture of the practice clearly, even a very active medical office can suffer from financial pressure.
This aspect can be addressed through outsourced accounting services for medical practices. Financial reports generated can be a great help for the doctors in figuring out if the practice is profitable and where and why the money is being lost and what can be done to prevent a problem turning into a crisis. Whether the accounting is internal, a healthcare accounting department outsourcing, or an accounting team offshore, the tracking of vital financial figures can make all the difference in decision-making.
Why Financial Numbers Matter in Medical Practice Accounting
A medical practice could be busy, having a high number of patients, and still not be financially sound just because its key numbers are not monitored consistently. Medical practice accounting is essential for doctors as it allows them not just to focus on revenue alone, but also to learn what's really happening with profitability, cash flow expenses collections, and debt.
Misread a paragraph to identify possible problems. If the number of denied claims increase, the payroll costs rise, and revenue per visit decreases, you might not get alarmed at first but the trends will show how the situation is developing. It will be much easier for doctors to address problems early when the financial reports are done consistently, regardless of who handles it. Through frequent financial reports, either internally or by healthcare accounting services, physicians can identify where the problem area may be, so that they can make the necessary changes promptly.
Here are nine financial metrics every doctor should watch regularly.
1. Net Profit Margin
In fact, revenue is not sufficient to inform you if your medical business is financially healthy. A particular practice may get big money from their patients, yet in the end still retain very little.
One useful indicator to track changes in a clinic's business health is the net profit margin, i.e. how much of the money brought in by the business stays after paying off all the operational expenses and other costs.
The fundamental formula is:
Net Profit Margin = Net Profit Total Revenue 100
Take the case of a medical clinic that makes $1 million and has $900,000 in expenses. In total, their profit would be only $100,000. Their net profit margin is also 10% (just divide and multiply the numbers).
Hospital doctors need to follow this parameter for an extended period rather than looking at one month's net profit number.
Watch for:
- Profitability that constantly gets worse.
- Cost of operations that goes way above the level of revenue growth
- Huge variations when comparing margins for different periods
- A scenario in which profitability doesn't align with the amount of work the practice has to handle.
A declining margin may indicate rising labor costs, inefficient billing, excessive overhead, or reimbursement problems.
2. Accounts Receivable and Days in A/R
Medical facilities commonly provide their services upfront and get pay later. Accounts receivable (A/R) is a figure indicating that patients, insurance companies, or other payers are in your debt. Though doctors should take the total A/R number into account they must also check days in accounts receivable.
Days in A/R is a metric that shows doctors how long their business is generally taking to collect their outstanding payments. The rising A/R amounts could even put in a cash flow bind a practice that is supposedly profitable on the balance sheet.
- Total receivables outstanding
- Amounts of receivables more than 30 day, 60 day, and 90 day
- Insurance claims remaining unpaid
- Patient's balances that are gradually becoming impossible to collect
- Variations in the average time of collection
Regular A/R reviews can help identify billing errors, denied claims, coding issues, and collection bottlenecks.
3. Monthly Cash Flow
Profit and cash flow are different things. A business might show a profit but still struggle to get cash at disposal if cash is bound in receivables.
Cash flow on a monthly basis follows the cash in and out of the business through the month.
Doctors should go through:
- Patient and payer payment receipts
- Payroll and benefits
- Rent and utilities
- Vendor payments
- Loan payments
- Equipment purchases
- Taxes and other financial obligations
A simple monthly cash-flow report can reveal whether the practice has enough liquidity to cover upcoming obligations.
Maintaining a cash reserve can also provide protection against slower reimbursement periods, unexpected repairs, or major equipment expenses.
4. Operating Expense Ratio
Every medical clinic has to spend money on day-to-day running expenses, but the real issue is whether or not this spend is within healthy limits compared to your incomes.
The operating expense ratio is an indicator that lets you understand the proportion of expenses to revenues.
Operating Expense Ratio = Operating Expenses / Revenue * 100
Frequent expenses consist of:
- The amount of money that employees get plus the cost of benefits offered to them
- Cost of office rent- Cost of medical supplies and consumables used
- Medical technology, like the computers, imaging facilities etc.
- Money spent on insurance policies- Cost of administrative work or out-sourced services
- Money paid for water, electricity and gas services
- Promotion or publicity work
- Legal, tax and other professional fees
If you keep a watch on this ratio every month you might get an early sign of the problem before it gets out of control.
If revenue remains stable while operating expenses continue rising, the practice may need to review staffing levels, vendor contracts, technology costs, or other overhead.
5. Revenue per Provider
One single office may employ many medical professionals (physicians, nurse practitioners, physician assistants) or other providers. Revenue per provider is useful to know how much each provider brings revenue into the practice at a certain period of time.
This can be found by provider-attributable revenue divided by the total number of providers, or with more precise productivity data for providers.
Prioritize what is important with this:
- Each provider is delivering
- how many new patients are coming in
- The specialties or services are different
- There is still space to bring another provider onboard,
- A provider's workload is not overworked,
- Revenue per provider alone is not a fair assessment of clinical quality.
It rather is a financial indicator which can be a decision support for staffing and capacity changes.
6. Collection Rate
Billing is a patient or insurance company but the amount being asked doesn't necessarily guarantee the practice will get the money.
Patient collections indicate that a medical bill can be paid and that means represent real income whereas collections are money a practice still has a bill for but has yet to get the payments.
To get the picture of how well a practice is managing collections of receivables it needs to consider alongside the collections figures, this:
- Submitted claims
- Claims settled
- Declined claims
- Adjusted claims
- Patient pay
- Balance unpaid
A collection rate decrease may be a symptom of errors made during eligibility verification coding documentation, claim submission, follow-up and patient billing.
Improving collection processes can sometimes increase available cash without requiring the practice to see more patients.
7. Payroll as a Percentage of Revenue
Staff members matter a lot in the functioning of a medical practice but payroll is often one of the biggest expenses. Doctors need to check payrolls against their gross revenue as a percentage to find out whether staffing expenses are consistent with the earnings generated by the clinic.
Costs to take into account should also be:
- Salaries and wages
- Employer payroll taxes
- Health insurance, retirement accounts, etc.
- Extra hours work
- Performance bonuses
- Short-term or freelance workers
A rising payroll ratio is not automatically a problem. For example, a practice may intentionally hire additional staff before expanding services.
The important point is to understand why the ratio is changing and whether the additional cost is producing an operational or financial benefit.
8. Patient Volume and Revenue per Visit
A high number of patients can be very telling about a doctor's revenue.
A physician has to keep tabs on the number of visits, average revenue per visit, and total revenue instead of only looking at total revenue.
To illustrate:
- An overwhelming number of patients who each pay a little can make for hard work without a proportional payoff for income.
- Then again, doctors who have a good number of patients and perform a few high-value services may generate about the same revenue but different staffing needs.
- A sudden fall in the number of consultations could influence the physician's revenue and affect cash flow, for instance, several weeks or months later.
Monitoring such metrics enables physicians to figure out what areas require their attention for improvement for demand patterns, scheduling mix of services, and reimbursement.
This information can also support decisions about extending office hours, adding providers, introducing services, or adjusting appointment capacity.
9. Cash Reserve and Debt Obligations
The last important figure that doctors should observe is to what extent they have cash to pay current bills.
A business may be producing good income and profit but still be in danger if it has outstanding debts or ongoing fixed payments like equipment leases, rental contracts, etc.
Factors you should look are:
- Money on hand
- Amount of monthly debts
- Balance still owed on the loan
- How much in taxes you are going to pay
- Financing for the purchase of machines
- Anticipated huge expenditures
- Maintaining adequate liquidity gives the practice more flexibility when circumstances change.
How These Numbers Work Together
It is important to understand that these nine metrics are not to be seen as separate but rather they are different parts of the same financial story.
Imagine that a clinic is doing well with revenue, but has a very poor cash flow because insurance money came in late. In another scenario, a practice might have a steadily growing patient population but a gradually shrinking profit margin due to in reality payroll and other operating costs have increased faster than revenue.
An effective monthly check-up could consist of looking into:
- Total income vs income per visit
- Net profit margin
- Cash flow
- Accounts receivable and the time to collection
- A collection rate
- Operating expenses
- Payroll percentage
- Provider productivity
- Debt and funds held for reserve
Usually it is better to look at the changes happening across several months rather than just reacting to one odd month.
When Should a Doctor Consider Professional Accounting Support?
Many doctors have neither the time nor the specialized financial skills to consistently interpret these numbers. A good professional healthcare accounting service can give doctors a new level of understanding of their business finances.
A knowledgeable accounting crew can provide help in what comes next areas:
- Keeping accurate records and financial reports
- Keeping track of what patients still owe you ( accounts receivable )
- Identifying the nature of various expenses
- Managing salaries and wages (payroll accounting)
- Generating cash-flow reports
- Creating budgets and predicting future outcomes
- Assisting with tax return preparation)
- Studying a company's financial performance
Some practices may prefer to Hire an Accountant internally whereas others can decide for an independent contractor or an external agency. The choice should ideally consider a few factors like the size and complexity of the practice, the budget available for such services, and the existing internal capability at the practice.
For practices looking to control administrative costs while accessing specialized support, offshore accounting services can also be part of an outsourced financial-management strategy.It is interesting to note though, that providers should be scrutinised for their healthcare-industry experiences, information security, communication processes, and experience with the practice's accounting requirements.
Doctors aren't expected to become financial experts to get the financial pulse of the practice. They do need the informed visibility to those numbers that impact profitability, cash flow collections staffing, and the future of the practice.
If physicians consistently watch these nine financial indicators, and utilize a reputable healthcare accounting services practice for assistance as needed, they can address concerns sooner and make better decisions for the future of their practice.
