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Ask-A-Consultant: Collections and overhead

Q:

In a private suburban practice, what would be the acceptable cash collected for every dollar billed assuming a mix of private insurance and some Medicare (20%) and no Medicaid? And what would be the average overhead for such a practice? Thanks for your help.

A:

COLLECTIONS

The collection statistic that you refer to is typically known as a “gross collection ratio” or an ”unadjusted collection ratio”. This ratio indicates the yield of your practice or what you collect for every dollar charged. It is typically calculated for successive periods of time (e.g. 6 or 12 months) since one month’s ratio is too volatile. This ratio is significantly affected by the fee schedule used by the practice and its payor mix. What kind of private insurance do your patient’s have? Traditional indemnity, PPO, HMO? Do you participate in any capitated contracts? What is your percentage of indigent care?

The higher your fees, relative to the allowable fees of your contractual payors, the lower your gross collection ratio. The lower your fees, or the fewer contractual payors, the higher your ratio. In terms of averages, the Medical Group Management Association’s (MGMA) 1999 Cost Survey reports average “Gross Fee for Service Collection Ratio” for OB/GYN practices of 68.81%

A better statistic to evaluate your collection performance is the Adjusted Collection Ratio (ARC). This statistic is calculated by dividing net payments (gross payments less refunds, returned checks and other payment bookkeeping adjustments) by net charges (gross charges less contractual adjustments). Again, this statistic should be calculated for periods of time not just monthly. The results of this calculation will tell you the percentage of fees you are collecting from what is available for you to collect. It measures the staff’s performance in their accounts receivable management duties. The only difference in the long term ACR and 100% adjusted collections is bad debt and other uncollectible accounts. Therefore, the optimal ACR percentage is 100% less your bad debt. For office based practices, this usually in the mid to high 90 percent range (95%-99%). If your ACR is lower, it is a strong indication that your AR management techniques or business procedures need to be revised.
 
OVERHEAD

In our experience, operating overhead rates for OB/GYN practices typically range from the mid 40% to the mid 50% as a percentage of collections. This statistic is impacted by the number of physicians in the group, their production, collection rate and payor mix, and the types of services provided. According to MGMA’s 1999 Cost Survey, average operating overhead for OB/GYN practices is 50.68%. However, the survey indicates 8.88% of the surveyed practices’ charge volume is for Medicare and Medicaid. If your volume of these payors is higher, and therefore your overall collections are lower, you would expect a higher overhead rate even with comparable costs.
The Operating Overhead statistic is based on the operating expenses of the practice excluding any physician related costs such as physician salaries, payroll taxes, fringe benefits including health dental or life insurance, pension plan contributions, education, travel and related expenses. The operating overhead is calculated by dividing these non-physician expenses by the net collections of the practice.
 
 

Russell B. Still (bio..)
Vice President

MMA does not provide legal, accounting, or tax advice.  If you need assistance in these areas, we recommend that you consult a qualified professional.  In addition, please note that a client relationship with MMA is not established by the submission of a question to this forum or by the publishing of MMA's response.



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