Show Me the Money!
There are several ways to understand how much money a practice or center is actually making. These numbers need to be reviewed on a monthly basis and compared to figures from both the previous month and the same month from the previous year.
The first piece of information you want to review is total revenues. If the number is decreasing, you should have your office manager look for dropping production (determine why the center is not as busy) or faltering collections (find out why the center is not collecting all that it is due). Remember that there are seasonal changes for total revenues for sleep medicine. For example, our surveys indicate that laboratories are busier during the summer months (since people usually sleep better in the cold) and everything will drop off at the beginning of the year (since people do not want to pay their full deductible so soon). Also, always expect a rush at the end of the year for those people who are trying to avoid the next year deductible or whose insurance runs out at the end of the year.
Next, review total expenses. If total expenses increase relative to the previous month or the previous year, it may indicate a single large expense (insurance premium, employee bonus, taxes, or equipment purchase), catching up on past bills, or inflation in your area.
Now that you have reviewed these numbers, it is time to make a few calculations or ratios. Some practices will run a general expense ratio in which they divide the total revenue by the total (nonphysician) expenses. If overall expense rises, but total revenue rises along with it, your profit will remain healthy. One also should always review profits. These are the dollars left over once all the expenses have been paid out. Although people often like to compare their profits to other standards in the field, it is often better to simply make sure that your profits are rising on a quarterly basis.
Now it is time to better understand how to manage your account receivables (AR). It is important to first calculate a gross collection ratio, which is designed to explain how much of your charges you actually collect. The formula is simple in that you divide the current receipts for a particular period of time by the charges associated with those receipts (remember receipts usually take 30 to 90 days on each claim). Most sleep centers or office practices should expect to see a 70% to 80% gross collection ratio. A net collection ratio will evaluate how much the practice collects of what was agreed upon by insurers. Here we take the receipts and divide by the charges from those receipts minus any contractual adjustments. This ratio should be above 90%. Finally, it is important to assess average times for returns on claims. This information may be useful for future negotiations with any company. Since you want these times to be as short as possible, we suggest you have a clause in the contract to allow for interest to be paid on late processing claims by the carrier (this can be hard to get).
Michael J. Breus, PhD, ABSM, is senior partner and founder of The Sleep Center Management Institute; www.sleepcentermanagement.com.
