Getting More From Your Financial Statements

The Reality Behind the Numbers.

BY JANE FREEMAN PHILLIPS, C.P.A.

Anyone can open their financial statements and look at the last line on the income statement that shows the practice net profitability (Figure 1). But your periodic financial statements are only a starting place when it comes to understanding your practice's financial health. Do doctors know the questions to ask your practice administrator to drill down to additional valuable information? This data is readily obtainable from your practice management system. Your administrator will already be familiar with most of the KPI (key performance indicators) discussed hereafter.

Figure 1. A sample income statement (not from a real practice) provided by the author.

Patient Visits: First, how many patients did your practice see last month? Compare that number to the patient visits in the previous month, the same month of the prior year, YTD (year to date) and YTD for the prior year. Since patient encounters are one major indicator of the productivity of your practice, measuring and comparing their numbers will show trends based on past performance that may help you predict and manage future patient flow.

You may also want to view details of new patient visits vs. established patient visits. These numbers may be helpful as you consider marketing, adding providers and planning necessary facility expansions.

Charges: Patient visits result in charges that are billed to your patients and to third parties responsible for their payment. Like patient encounters, gross charges should be analyzed using historical data. You might wish to review the practice's charge data on a provider-by-provider basis, as well.

Collections: Now you will want to review the collections that result from the patient visits, work RVUs and charges we have previously analyzed. Here again, variance analyses that include current month, prior month, same month prior year, year to date and previous year-to-date collections will produce trends that will assist you in understanding your practice. Every practice requires cash with which to operate, and these numbers will help you understand how much cash you are receiving to pay your operating expenses.

Collection Ratios: An additional measure of collections is to use the accumulated data to calculate collection ratios. In other words, how many dollars did you collect for each dollar you billed? Gross collection ratio is total charges divided by total collections for that charge and should be analyzed as all your other KPIs.

Net collection ratios are calculated by total charges less their contractual adjustments divided by total collections for those charges.

In a practice environment that encourages accountability, you may also consider adopting an annual operating budget and comparing your charges and collections to budgeted amounts. This will also give you a sense of the efficiency of your billing staff.

Accounts Receivable: So far, everything we have talked about culminates in your accounts receivable (A/R) data. Therefore, detailed analysis of A/R is essential in a well-managed practice. Again, you will compare current periods to prior periods.

You will also benefit from reviewing the number of days that charges are in your accounts receivable balance for the current period as well as for the same time the previous year.

Finally, you should track the age of your receivables by payer class in dollars and as a percentage of total A/R.

By monitoring your receivables and their aging trends, you will be able to proactively manage your practice's billing and collections and thereby a large portion of your practice. You will also be able to spot things like deterioration in the aging of the patient responsibility portion of A/R from changing circumstances such as increased high-deductible plans and health savings accounts where the patient bears more financial responsibility.

Payer Mix: There is one last revenue-focused KPI that you should watch. Payer mix is a crucial piece of information in any practice. If you understand your current payer mix and each payer's collection ratio, you can make better decisions about the managed care contracts you should sign based on the fee schedules you are offered. You can eliminate inequities between different payers, and negotiate with others from a stronger position.

Operating Expenses: And no financial statement analysis is complete without a look at the cost of operating your practice. Here again, you should compare the current operating expenses of your practice with historic amounts — both monthly and YTD — and you should calculate and track the percentage of your revenues being consumed by these expenses. Watching your expense trends will give you vital information that will enhance your ability to manage your practice.

Each of the KPIs measured above should also be benchmarked against others in your specialty in your region. There are studies published each year which contain comparable ratios and amounts that will help you understand how you stand among your peers. Perhaps nothing is more helpful than comparing your practice to that of your colleagues. OM