To Run a Financially Healthy Practice, Get to Know These Five KPIs

Although it’s significant, cash flow alone isn’t a reliable barometer of financial health for a medical practice. How can you identify areas of financial strength and where improvements are needed?

By understanding these 5 key performance indicators (KPIs), you can gain valuable insights into your practice’s revenue cycle. Keep in mind that KPI guidelines may vary based on specific goals of your practice or nuances of your specialty.

1. Adjusted collection rate

Start by monitoring payment trends. Track overall speed to payment and keep an eye on unbilled charges. What percentage of your practice’s total charges get paid? To find out, calculate the adjusted collection rate: 

• Determine the sum total of all payments less refunds 
• Divide this number by total charges less adjustments 
• Multiply by 100 to obtain a percentage 

As a general standard, your practice should seek an adjusted collection rate above 95%.

By tracking adjusted collection rate and monitoring payments, your practice can project cash flows more accurately—essential to business planning. The quicker you identify practices by third-party payers that harm your practice’s cash flow, the sooner you can address them.

2. Bad debt

Uncollected patient responsibility that is deemed unrecoverable is referred to as bad debt.  Monitoring and analyzing bad debt data provides insight into the effectiveness of your practice’s point-of-service and overall collection efforts from patients. To calculate the bad debt average:

• Determine bad debt totals, as shown on the income statement
• Divide this figure by gross patient service revenue over time

A lower bad debt average indicates efficiency in the revenue cycle process, especially with regard to patient collections. 

3. Clean claims rate

The percentage of claims submitted to third-party payers without defect or manual intervention is called the clean claims rate. To determine the clean claims rate:

• Total the number of claims billed out electronically without deficiency 
• Divide this figure by the number of claims accepted by payers

As a general guideline, an acceptable cleans claims rate is 95% or higher. However, this may vary depending upon the type of practice and other factors.

Best practice is to monitor clean claims rate monthly; quarterly is acceptable. Doing so will uncover any issues with your practice’s front-end or claim submission processes. Eliminating barriers to clean claims submission—such as persistent demographic or medical coding errors—means faster payment.

4. Days in A/R

This KPI represents the average amount of time it takes for your services to be reimbursed. To calculate days in accounts receivable (A/R):

• Determine the total amount in A/R 
• Divide this figure by the average daily charge for the last 90 days. 

An acceptable range for days in A/R is 18 to 32 days.

Applying an appropriate A/R benchmark and monitoring how your organization performs against it will help guide process improvements in claims submission and billing. Best practice is to monitor days in A/R monthly and more frequently if your organization is experiencing any business-related changes. 

5. Denial rate

The percentage of claims denied by payers is referred to as the denial rate. To calculate your practice’s denial rate within an established time frame:

• Add the total dollar amount of claims denied by payers 
• Divide by the total dollar amount of claims submitted 

In general, a denial rate under 10% is considered acceptable. This may vary depending upon the type of denial, such as an initial denial compared to one received after an appeal, specialty, and other factors. 

If your denial rate is high, you should take a look at the types of denials you're receiving. There are many reasons a claim may be denied. Payers may reject services due to a lack of medical necessity or because services took place outside of the appropriate time frame. Denials may also be attributed to non-coverage by the patient’s insurance plan. What process does your practice have in place to prevent denials?

A low denial rate indicates a strong claims submission process and likelihood of healthy cash flow. What’s more, your practice needs fewer staff members to collect the cash you’ve earned.

Apply KPIs for better practice

KPIs are measurable, objective values. They enable you to develop precise, obtainable business goals and measure your progress toward meeting these goals. If you can improve processes at the front desk and in the back office as a result, it will help with cash collections—and provide a better experience for physicians, staff, and patients. 

We’ve all heard the expression, “work smarter, not harder.” KPIs are the key to working smarter in the business of medicine.