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August 2009 Six Steps to Finding the True Value of Your Receivables
Dear Reader,
In a recent interview published in HFMA with Ziegler’s David Johnson, Johnson discussed the reasons healthcare companies typically pay higher interest rates and are straddled with more stringent agreements than borrowers in other industries. Johnson stated, “This occurs because the disclosure that health systems provide for public debt offerings is not always consistent, timely and comparable.” He added, “There is even uncertainty about core concepts: what is revenue What is bad debt”
 If revenue is inconsistently defined and bad debt is unclear, how can the value of the receivables be measured with any certainty The simple answer is receivables are only worth what can be collected from them –net of the cost of collection.
Unfortunately, most healthcare companies overvalue their receivables.This can lead to problems when the company attempts to use the receivables as collateral for a loan or in a factoring transaction, or while in the midst of a merger or acquisition, not to mention in projecting cash flow. Get an accurate picture of your receivables by using the following six steps.
Six Steps to Calculating the Real Worth of Your Receivables
Forget the scalpel. Get an axe.
- Separate the “self-pay” receivables from the insurance receivables. Look at your historical average collections of self-pay receivables as a percentage. Apply that percentage to the self-pay A/R and deduct the rest.
- Run aging reports for the insurance receivables by the payer currently responsible for the bill. Use aging buckets that allow you to age the receivables out to the point where they will be past timely filing. Deduct any dollars beyond timely. Be ruthless. Yes, some may be able to be appealed, but that will be the exception, not the rule.
- Take the A/R that is still within timely and differentiate between primary and secondary balances. Consider what it will cost to file a secondary claim. Set a dollar limit that any balance below it will be unprofitable to re-file because of the labor cost. Cut anything below that limit from your outstanding A/R if it should have been paid by now had it crossed over correctly.
- From what’s left, chop off the amount that is above the contractual, if your system hasn’t already done so. And, if your system has already made the adjustment, do a quick study to see how often the system’s contractual is correct. If you review 100 insurance payments from your top 10 payers, and you find that you usually have to do an additional write-off, reduce your receivables by the average percentage write-off of the ones you reviewed.
- At this point you might be quite surprised by how little is left of the original big number. If you dare, consider by payer what percentage of the remaining A/R you will actually collect. Use a percentage that declines as the receivable ages.
- Calculate the length of time it will take to collect the remaining A/R and the cost. You might use your average monthly costs as a percentage of collections and then bump it up a bit. These receivables are more difficult and time-consuming to collect as they include a disproportionate amount of older receivables than the ones you are currently collecting.
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