How to Determine the Financial Metrics of Medical Practices

By Nick Hernandez, MBA, FACHE | Published 8/31/2017 0

In my last post, I covered operational performance metrics. Here, I will cover performance metrics from a more financial perspective. Financial metrics not only help to track the performance of your practice but also can be used to increase accountability of your in-house staff as well as outsourced billing companies. The latter factor can be quite useful when it comes time to renegotiate contracts with these companies.


Average revenue per patient

This measure relates to the Average Cost Per Patient ratio. Your target is high revenue per patient combined with low cost per patient.


Average revenue per day

Comparing this ratio to your daily charges shows you if each day’s work—at least in terms of revenue production—is above or below average. In effect, it shows how busy you are. Many factors, including surgery schedules and the number of physicians working a day’s sessions, greatly affect daily charges. Investigate the reasons behind any significant variance. If your adjusted charges per day increases by more than inflation over time, it suggests your practice is growing.


Accounts Receivable per FTE physician

This ratio calculates an average amount owed for each physician’s work. Totaling the receivables for each doctor and comparing that amount with the group’s average may expose poor coding skills or a lackadaisical effort at keeping up with paperwork. “Dirty” and/or tardy claims will virtually always take longer to process than do clean ones.


First pass resolution rate

This is the share of a practice’s claims that gets paid on first submission. It is said that this should be above 90%. This calculation is a reflection of the effectiveness of your revenue cycle management processes, from pre-visit processes like verifying insurance eligibility, adding required authorizations, and maintaining accurate patient demographics to post-visit tasks like coding and billing. Getting it right the first time is critical to maximizing both efficiency and profitability.


Percentage of Accounts Receivable >120 Days

Accounts Receivable is generally grouped into aging buckets based on 30-day increments of elapsed time (30, 60, 90, 120 days). All A/R aged over 120 days falls in the inclusive A/R >120 day bucket. A/R greater than 120 days is a clear indicator of how effective your practice is at securing reimbursements in a timely manner. High or rising percentages are red flags alerting you of issues with your practice’s revenue cycle management that need to be addressed promptly. For example, your staff may not be acting quickly enough on denials or aged claims.


Days in Accounts Receivable

Tracking days in A/R helps monitor billing and collections. The greater this number becomes, the longer it takes insurance plans and patients to pay you. You absolutely must find out why that’s happening. This calculation represents the average number of days it takes a practice to get paid. The lower the number, the faster a practice is obtaining payment on average. It is said that this number should stay below 50 days at a minimum, but should generally be more in the 30-40 day range. In addition to providing insight into the efficiency of your revenue cycle management processes, monitoring this metric can help you unearth factors hurting your finances. For example, when assessing the cause of an increase, you may spot a problem with a certain payor and can then work to resolve it quickly.

Related Content: How to Evaluate Medical Billing Services

Gross collections ratio

This basic ratio simply shows how much of what you bill for, you actually receive. By itself, it tells little. But compare it with the net collection ratio which is coming up, and it will help determine whether your fees are too high or too low.


Net collections ratio

Due to contractual adjustments, you are undoubtedly collecting less than ever of what you charge, making it more important than ever to actually collect all of what you are legally entitled to receive. This ratio is the percentage of total potential reimbursement collected out of the total allowed amount. It is also commonly referred to as the “adjusted collection rate.” This metric lets you assess your practice’s effectiveness when all is said and done (i.e., claims have been submitted, denials processed, patients billed). It tells you objectively the share of the revenue your practice deserves but left on the table. The lost opportunity reflects factors within your practice’s control (for example, untimely filing) and others beyond its control (for example, uncollectible debt). Weak ongoing net collection rates may compel practices to replace staff, revamp processes, invest in new tools, or outsource revenue cycle management to increase profitability. Again, this calculation incorporates your contractual disallowances, telling how much of what you’ve agreed to be paid, you actually receive.



One particular notion I like to address with my clients is benchmarking with national data.  While using national benchmarks is acceptable, that data should not be viewed as the gospel. For example, if a national benchmark is 92% but you are currently sitting at 80%, then your immediate goal should be to get to, say, 85% and then 90% and so on. If you set the bar too high initially, staff will become frustrated and see the national benchmark as unattainable. On the other hand, if your practice is at 96%, do you simply stop improvement efforts? Or do you continue to strive to make the best better?

You also have to keep in mind the extreme variability with national benchmark data (i.e., specialties surveyed, sample size, payer mix, services rendered, geography, etc.).  Consequently, this benchmark data is really little more than a ballpark number for you to look at. As I mentioned in my last post on operational metrics, you must remember to measure what matters. Find out the key essentials to your practice, not just what others in your specialty are measuring. And by all means, keep it simple…simple to operate, simple to understand, and simple to action.


Nick Hernandez, MBA, FACHE


Nick Hernandez, MBA, FACHE is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives.

Since founding ABISA in 2007, his emphasis has been on developing and maintaining a strong relationship with physicians and identifying areas for business opportunity and support. The company’s client list includes physician groups, hospital systems, healthcare IT organizations, venture capitalists, private equity firms, and hedge fund managers.

Nick is a graduate of the United States Naval Academy and a former Captain in the U.S. Marine Corps. He holds MBA degrees in both Operations Management and Information Technology & E-Business Management from Wake Forest University. He is Board Certified in Healthcare Management and has been named a Fellow of the American College of Healthcare Executives.

He is a frequent guest lecturer and is often quoted in the national media. He has consulted with clients in multiple countries and has over 20 years of leadership and operations experience. Nick is a Subject Matter Expert in business strategy, practice management, telemedicine, health IT, and oncology.

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