Diagnosing Cash Flow Problems in a Medical Practice

March 27, 2014
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cash flow medical practiceMost small and mid-sized medical practices operate in a difficult environment. They face constant pressures from insurers, who continually negotiate to pay lower prices and to have longer payment terms. Medical practices also face increased operating expenses. In most areas, the cost to rent offices, hire staff, and buy medical supplies has been increasing steadily.

cash flow medical practiceMost small and mid-sized medical practices operate in a difficult environment. They face constant pressures from insurers, who continually negotiate to pay lower prices and to have longer payment terms. Medical practices also face increased operating expenses. In most areas, the cost to rent offices, hire staff, and buy medical supplies has been increasing steadily.

Under these conditions, it’s easy for medical practices to experience financial problems. These problems often affect smaller practices that don’t have a dedicated financial professional to establish financial controls.

Fortunately, cash flow problems themselves are not hard to diagnose. They can originate from only a few areas. Fixing these problems, however, is often challenging and requires making difficult choices. Here are five common problems that can affect cash flow:

Diagnosis #1: Low gross margins

A common problem for practices is to have gross margins that are so low that some services are offered at a loss. These problems can go undetected unless you know how much it costs to deliver each service. Calculate the fully loaded (all-inclusive) cost to deliver each service or procedure and then determine whether it’s profitable. Obviously, the profitability of the service depends on the insurance company that is paying for it.

Diagnosis #2: High overhead costs

Determine if the overhead costs are reasonable based on the services you offer and the revenues you generate. Excess overhead decreases available cash flow and uses resources that could be better invested elsewhere. However, solving high overhead issues can be difficult, especially if they involve staff.

Diagnosis #3: Bloated inventories

Having excess inventory – substantially more than you need for regular operations – ties up financial resources. Although this issue can affect any medical practice, it’s more common in practices that perform procedures requiring expensive medications or items. This problem can be solved by improving inventory practices.

Diagnosis #4: Slow collections and bad debt

Slow collections is a common problem for most medical practices. HMOs, PPOs, and most medical insurance plans tend to pay claims in 60 to 90 days – sometimes even longer. Aggravating this issue is the fact that insurance companies change billing procedures and codes often, which makes billing itself difficult. The result is that your financial resources are tied in slow-paying medical claims.

Another common problem is bad debt generated by unpaid medical bills. Both of these problems seriously impact your cash flow.

Diagnosis #5: Low cash reserves

Medical practices need a cash reserve that allows them to handle operating expenses. Cash reserves can smooth out the ebbs and flows of the revenue/expense cycle and enable you to operate the practice without cash flow problems.

However, most new medical practices don’t have adequate cash reserves. And practices that are growing can easily deplete existing reserves. This problem can be fixed by adding capital to the reserves or by complementing the reserves with business financing. For additional information on how to handle this problem, read the article, “Financing a Medical Practice with Cash Flow Problems.”

Treating cash flow problems

Like most diseases, cash flow problems can be treated if they are detected early enough and if you take appropriate action quickly. Unless you have financial expertise, or the practice has a financial manager, consider hiring a CPA with experience in healthcare practices. An experienced CPA can help you create the needed financial reports, financial metrics, and plan of action to help you understand and remedy your financial situation. 

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