In one of our previous blogs, Using a Revenue Recovery Service to Recover debt, we discussed the risk undertaken by a business extending credit to another business, or consumer, by providing services in exchange for a promise of “due and proper consideration”. In layman’s terms, this means that a company extends credit to a customer by issuing an invoice for a product or service already provided and then expecting payment of such product or service in the near future. In accounting terms, this process bears the name of ‘accounts receivable’.
In order to help medical practices and businesses monitor and control that credit risk, we have compiled this list of best practices for the management of accounts receivables:
1. Always state the terms and conditions of payment clearly in the contract, even when dealing with friendly patients or reputable companies.
A payment provision ensures that the customer is aware of what happens should they default on the contract, and lists any fees, interest or penalties associated with non-compliance. In addition, it helps your business automate the accounts receivable process, especially when you tend to use the same payment terms for all your customers. In the case of a medical practice, checking a patient’s insurance and making sure they understand their co-pay and deductible during that first introductory meeting is paramount. Not only will they be more likely to have the payment readily available when they walk through the door for future appointments, but it will give them a sense of control and safety over their ability to pursue medical care and pay for it.
2. Do not assume that a future receivable is money in your company’s coffers now.
One of the most important risks to a company’s growth and profitability is expecting money you don’t have yet and then using that as credit to take further risks. Even though a receivable is recorded on your balance sheet as a current or long-term asset, depending on whether the balance is due in less than a year or more, it carries a high risk of long-term debt to you or even an uncollectable account. Make sure your patients understand your billing policy by stating it on initial bills and later payment reminders, including details such as the billing cycle, any deadlines they must meet, the options to pay online or over the phone, any fees for the options, and the option to arrange a payment plan for special cases, if you can offer them. Offer incentives for patients to pay their high deductible in a lump sum.
3. Carrying the lowest possible level of bad debt involves having a sound credit policy and shortened collection periods.
As a business owner, you have to extend credit only as far as your business can afford the risk. There is always an allowance for doubtful accounts, but don’t become negligent about how much you allow. One way of monitoring this is tracking a patient’s pattern of paying their bills to you. If you realize that a patient has a hard time paying some bills but not others, give them the benefit of the doubt. Do they tend to pay their bills more consistently when they receive their paycheck? When their kids’ school year starts so they don’t have to pay for childcare while they’re on vacation? Getting to know repeat customers with a periodic phone call can give you more insights into their situation, which in turn can help your business decisions about their account. A human touch pays off.
4. Always verify the patient’s current address and contact information, as well as the best time to contact them.
Otherwise, it will take you more time later to track them down, delaying a payment they might have made promptly if you were able to reach them quickly.
5. Never threaten to send your patient’s account to a collection agency except for cases when it is legally allowed and you actually intend to do so.
Medical collections fall under the purview of the FDCPA, which means, among others, that you can’t use an abusive, deceptive or unfair practice to threaten an action that you don’t intend to take, make a collection call before 8 a.m. or after 9 p.m. in the patient’s time zone, or call their place of employment if the patient has not given you permission to do so. There are many other legal prohibitions, for instance disclosure to a third party without their permission, such as to a daughter, neighbor, or baby-sitter that the customer has a debt, stamping ‘outstanding balance’ or ‘past due’ on envelopes addressed to your patient, or contacting the patient by postcard for the purpose of collecting.
6. Make sure you use the right codes.
One of the biggest problems for health care providers is having a claim denied and then having to reprocess it. Codes are changed, deleted or introduced every year, and you can use “cms.gov” or “findacode.com” to quickly verify if you’re using the correct codes.
7. Understand when a decreasing total for accounts receivable is indicative of your practice’s good financial health and when you should worry.
You should see decreasing accounts receivable as good when your cash inflow increases. That means that the amount of debt owed to your company has decreased. The other side of the coin is when you decrease accounts receivables by writing debt off as forgiven or uncollectable. You should be able to deduct that on your tax returns, but having too many such deductions or listing them year after year should be a sign that you need to change the way you manage your accounts receivable.
8. Don’t ignore the importance of human error and staffing.
Given the increasing trend of insurance companies to deny claims for the smallest of errors, you need to offer sufficient training and documented best practices and monitor how well staff applies them so you can rely on them to keep accurate records, track and correct errors, communicate efficiently, report issues and come up with solutions, use overtime only as strictly needed, and make other important day-to-day decisions.
9. Use the marketing methods that are at everyone’s fingertips these days.
This means not only word-of-mouth but also online tools such as Facebook, Instagram, Google Ads. Your practice can increase significantly by acquiring new patients. That being said, beware of public negative reviews and your response to them. Leaving a bad review unanswered will insert doubts into potential patients’ minds or confirm some borderline experiences they’ve had in your office. Your reputation as a sole practitioner is what can help your business grow or stay afloat.
10. Maintain clear records of your practice’s attempts to collect an outstanding balance.
That will not only inform your decision to seek help from a debt collection agency or write off the debt, but it will also prove to the IRS that you made a reasonable effort to collect on a debt you intend to deduct on your taxes. You have to keep in mind that the debt is only deductible in the year the debt becomes worthless.
Finally, always remember that accounts receivable is different from a cash transaction in that the payment takes place at a later time.
For that reason, an unreceived payment carries a higher risk for the business awaiting the funds. The balance due from the debtor may take from a few weeks to more than a year to be received by the crediting business (i.e. the creditor), which may leave the creditor exposed. For medical practices, the risk is often even higher because of the hoops they have to jump through with patients and third parties, such as insurance companies.
These are all reasons why your business needs to invest in ways to manage accounts receivable to minimize the financial risk associated with them and convert them into solid cash sooner rather than later.
