Hygiene Salaries Holding Their Own, So Far
As of late, I have been noticing large credit balances on the Accounts Receivable reports of dental practices that come in for Advanced Business Training. Unmanaged credit balances on accounts distort your profitability and misrepresent your AR percentages. Difficult to identify and easy to ignore, credit balances are often left on accounts because of the time needed to justify and resolve them. “The doctor is more concerned with people who owe us money,” said one trainee. “We have thousands of dollars in credit balances on accounts and the way the economy is, the Doctor doesn’t need to know he has to return most of that money.” The truth be known, most dentists are not aware of the amount of money sitting on their accounts that may not be theirs to keep.
What is a credit balance? A credit balance is an amount on a provider’s accounts receivable (AR) that has payments and allowances exceeding total charges. For example, if you charge patient Tom Jones for a two-surface resin $250.00 and he pays you $100.00, the total AR is $150.00. Then patient John Wheel is charged $200.00 for a cleaning and exam and his insurance pays $210.00. Your total AR is now showing $140.00 reflecting the credit balance of $10.00 on John Wheels’ account. The real AR balance is $150.00. Multiply this by many accounts and you can see how the accounts receivable will be off by hundreds or even thousands of dollars.
What causes credit balances? There can be many reasons for credit balances on accounts, including billing and payment errors, overpayments on insurance claims or duplicate payments from insurance companies. Receipts of “down payments” from patients prior to treatment being charged out, such as orthodontic cases or prosthodontic cases, will show an inflated credit balance report and subsequent lower AR percentage. Misposted allowances from PPO plans need to be carefully checked to make sure that credit balances are not errors that need to be adjusted to a zero balance. We don’t want to return money that is not owed. A good collection policy of estimating and collecting co-payments and deductibles at the time of service can result in higher than normal credit balances. Inform the patient as soon as insurance payments are received with a statement to show the credit and a note asking the patient if you should return the money or leave it on the account for the next visit to the office. Often patients opt to leave the balance on their accounts to cover future co-pays or deductibles.
Why do we need to know the AR balance? The normal total accounts receivable should not be more than 1 X the previous monthly production. A healthy AR should not have more than 10–12% in 90 days past due. To understand the AR aging report, generate an accounts receivable aging report (without credit balances if possible) and a separate Credit Balance Report at the end of the month. Otherwise, the credit balances have to be added back into the Current Amount and the Total Amount of AR listed on your report to get the accurate amount of money owed to the practice. There should be no insurance claims outstanding more than 31 days. The aging report is used to identify the health of the AR department and to control the amount of monies owed to the practice. When numbers are thrown off by aging credit balances on accounts, it is difficult or impossible to know if the practice numbers are healthy or not. One of the best ways to measure the performance of your business staff is now null and void when convoluted with credit balances.
Clean up the credit balance mess. A common mistake in practices is to not check the account balances of patients as they come into the practice for recall or follow-up treatment. Collecting the amount charged today without subtracting out the credit balance allows the credit to remain on the books for longer periods of time. If patients discover their credit balances before you inform them, you are creating an atmosphere of mistrust that could result in the loss of patients. If you discover that you have thousands of legitimate credit balances on your books, start to remedy the matter by contacting a few patients at a time, budgeted into what you can afford to pay out and still make your overhead obligations. Check to see if these patients need treatment and suggest that the credits be applied to future services.
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Dr. Greg Williams—Case Study #531
It is interesting to note that when times are good, a dentist owner can fall short when it comes to being a business owner.
Dr. Williams now understands what a poor business owner he has been. His practice ran on automatic, but it worked fine for eight years because times were good—even great!
What Dr. Williams Had to Learn:
What Dr. Williams Discovered about His Practice:
His Accounts Receivable Report revealed that the ratio of A/R to Net Production was close to 2x his net production. Industry standards are 1x or less. Interestingly enough, he was given an A/R report each month that revealed his A/R ratio was 1.3 and he was okay with that. The fact was that his true A/R was 1.8 because the A/R report that was being generated by his Financial Coordinator included $35,000 in credit balances. This was reducing his true A/R by $35,000! She didn’t know any different and he didn’t either.
How Dr. Williams “Turned over Rocks”:
1) $20,000 in outstanding insurance claims is an example of cash sitting on a tree ready to be picked. All it takes is someone to pick it. The Financial Coordinator should be making telephone calls to the insurance companies at 15–20 days past due if the claims are submitted electronically and still outstanding.
What should the doctor do? Review the “Outstanding Insurance Claims Aging Report” monthly to confirm that the claims over 60 and 90 days are minimal. No days overdue would be the goal, but at minimum the Financial Coordinator should know exactly what the delay is on each claim that is not paid.
2) Accounts Receivables over 90 days should be addressed in the following manner:
What should the doctor do? Ask for a copy of the Accounts Receivable Aging Report each month and take a few minutes to review it with the Financial Coordinator. Discuss where the breakdown was that caused any accounts to become delinquent. Unless the patient gives you a bad check or credit card, the responsibility falls on the Financial Coordinator. About 2% of all net production should be written off as bad debt. Any more than that is a sign of breakdown. Be sure to review your Adjustments Report along with the Aging Report to see how many dollars are indeed being written off to bad debt.
Need extra cash for the practice? Contact McKenzie Management to learn about turning over rocks in your practice.