The objective of any successful revenue enhancement strategy is to build and improve on current payment levels and then to recover arrear debt. As indicated, this document seeks to identify causes for non-payment and to develop a strategy to address those challenges.
What is revenue enhancement strategy?
Revenue enhancement is essentially the practice of trying to collect more of the existing revenue and includes arrears.
Why should revenue enhancement strategy be part of debt recovery?
Trying to collect current unpaid debt can sometimes be seen as just another cost that has to be recovered from the patient in a renegotiation exercise. However, that view of revenue enhancement is short sighted and can sometimes mean that the full potential of revenue enhancement is not uncovered.
A certain level of current debt is acceptable but anything which is in arrears is a real blight on the credit record of a practice. More importantly, the effect of a lower debt level can be seen in the ability of a practice to increase its market share and, therefore, the ability to recover more future revenue.
What are the possible revenue enhancement strategies?
Taking a short-term view of revenue enhancement, there are basically four possible strategies:
- Reduce the current debt
- Encourage good payment by patients by offering an incentive scheme
- Increase price if necessary
- Attempt to recover lost revenue from other sources
Sounds simple. How do you do it?
The process for identifying potential sources of revenue enhancement is more detailed than the four above options. Many of the factors are dependent on the ability to capture and process accurate information.
Financial difficulties of a practice can impact upon staff morale as well as the delivery of dental services to patients.
Many practices do not capture, store and or capture payment information on a regular basis. This is problematic for any business but particularly so for the practice of providing treatments which rely on prompt payment.
Does it matter if we do not have accurate data?
Well, it might if the information that is available is used to decide whether or not to continue to treat certain patients or to continue a particular service. If a decision is made based on inadequate information alone, the outcome is likely to be both unjustified and costly to the business.
So, if you want to make better decisions in your business then you should start by ensuring that you have accurate information from which to make informed decisions. Simple!
The process outlined below recognises that decisions must be made based on accurate data and that the data must be reported in a form that allows easy analysis and comparison.
Why is it necessary to prepare a detailed report?
No decision should be taken in isolation. Data that appears to be contradictory may be reported in separate columns and a possible explanation for the difference considered. For example, if your payment has been written for a number of months consistently in the ‘Patient’s Account’ column and a proposal is made to discontinue treatment then the first question should be, “Has prompt payment been made?”. If the answer is yes then this could be the explanation for the continued unsatisfactory debt position.
However, if the answer is no then an explanation for the non-payment must be found. If, as part of this process, you discover that prompt payment by a patient is not being made on a regular basis, then this information about the patient’s payment history should be collated and analysed. Although the treatment may continue, the information could be used to cross-reference the patient’s records with payment histories on other accounts. The outcome of this process may well be that the patient is now treated as a credit risk and the cost of making the decision too late in the day could be an avoidable future revenue loss.
Assumptions & Restrictions
We all make assumptions and for most people these assumptions are part of our day to day lives and help us in answering questions. Assumptions are often based on what we know and, at first glance, can seem to be a perfectly valid approach to answering questions which are posed. Therefore, the caution in this section is not to criticise the fact that assumptions are made but to say that the assumptions should be made explicit and recorded in a report.
Also, pay particular attention to any restrictions that may arise because of this report. For example, as mentioned before, be very careful about making any assumptions about prompt payment. If you are in any doubt as to whether any of your patients are in arrears then it is important to question your practice staff. It is important to get all the information about your patients upfront and not wait until it is too late to correct an assumption.
Experience has taught us that assumptions made about credit worthiness are a common cause for financial difficulties for any business. PPI is no exception to this but often the poor relationship between a practice and patients is at the heart of the problem.
You have a production level of 40 treatments per day and you are doing a production of 35 treatments per day. What is your personnel to production ratio?
We all know that PPI is a ratio of some kind. We all know that it is the ratio between two factors and is equal to the smaller value divided by the larger value. However, debtors, in the same way, know that PPI is essentially a ratio between the number of persons employed and the revenue that is generated.
You want to calculate the PPI for your practice and the best way to do this will be to work through each of the elements separately. Let us assume that your practice has an average of 650 annual appointments per annum and produces 4,000 revenue per annum.
Revenue = Revenue generated
Appointments = Appointments per annum multiplied by the number of days per year
So our calculation will be:
(4,000 customer appointments per year) x (60 days per year)
= 240,000 customer appointments per year
Decreasing the denominator by 20% and multiplying the numerator by two = 5,000
Calculation: 4,000 /5,000 = 0.8
Our practice has an employee to production ratio of 0.8
This is a ratio of 0.8, not an absolute number
Total debtors = A customers’ accounts where monies have been outstanding for 90 days and more
Approach #1: Keep it simple
Costs to collect 1,000 in 1 year whilst taking 0.35 from the sale price = 0.58 per account
Costs to collect 1,000 in Year 1 whilst taking 0.4 from the sale price = 0.64 per account
Costs to collect 1,000 over Year 2 whilst taking 0.38 from the sale price = 0.62 per account
Calculation = 0.3663
Therefore your total outstanding debtors are approximately 50 + 25 + 32 + 26 + 22 + 28 + 22 = 155
Calculation = 0.3788
Therefore your total outstanding debtors are approximately 6 + 22 + 24 + 21 + 14 + 36 + 10 + 33 = 165
Before we move on to the next part of this session we need to ensure that we are clear about at least two limitations of the review process outlined.
There are aspects of the payments process which are not reflected in this statistical report. In particular, there is a difference between a patient’s financial ability to pay and their willingness to pay. Many practices have found that both the latter and the former are negatively affected by a prolonged hospital treatment period. The incidence of patients and their families incurring high levels of financial debt at the time of treatment is recognised and organisations exist to support this behaviour but the impact on a practice’s ability to cash-flow is significant.
Secondly, if you cannot capture prompt payments then the report will not provide an accurate picture. Many practices have an unfortunate history of money owed to them and this can have an effect on the future reporting.
The production level today for this practice was 12 treatments. How did your PPI change when you moved to financial independence?
Answer: Your PPI when you were self-employed was 0.60 (60% of your revenue went on staff costs), when you went into financial independence your PPI must have changed. The rules in financial independence are the same as the ratio that was in place during your self-employment. In other words, if you had a targeted PPI of 0.30 (30% of your revenue must be used to pay your staff costs) then this ratio would still be in place during financial independence.
This means that 10 (10 + 15 + 13 + 17 + 7 + 0), or 189, of the 227 appointments should have been billed through appointment accounts. However, when we take the 0.30 staff cost ratio and multiply by the number of treatments we get 0.97, which is a staff cost percentage that is just over 8% per transaction.
Calculation = 0.30 x 12 = 3.6
Therefore in total the practice should have billed 3.6 times, or 36 treatments, to patients who were not registered with the practice.
Comment: This is not a very good result so the practice will either need to improve their system or find more patient referrals to help meet their financial targets.
All practices make mistakes and this is not the first one that we have come across. The important point is that you RCA
your system and find out what went wrong. If an adjusted ratio is used, or if an adjustment is made to a report, the practice should get a test transaction and test the adjusted result to ensure that the adjustment is correct.
The practice will not be aware of the strength of the relationship between the individual patients and their local practice or of the reasons for a short period of arrears. It is impossible to guess at the timing of cash-flow problems and, as a result, a practice may find that they are, in fact, non-existent. At the very least, a good review should produce a shortlist of the most realistic debtors and any other unpaid accounts.
In addition, it is important to be clear about the terms of those poor relationships. To many staff outside the practice the distinction between cash-wise and non-cash-wise patients seems like a relatively trivial matter. However, to medical staff in an acute care setting it is a very relevant and, sometimes, an important factor. It is possible, therefore, for a practice to gain an enormous amount of useful information from the judicious use of collections data.
By applying the following tests you will be able to check out the actual results from your collections review.
The practice should be able to see how their patients are performing over an ‘experimental’ period, as follows:
Calculation: 1,000,000 less 10,000 equals 990,000
Total debtors = 6,000(Type A from A2) + 3,000 (Type B from A2) = 9,000
Total debtors = Amount of debtors in arrears 90 days or more
Debtors = Amount owed
Within an RF for care services you can have a highly developed system for coding a large amount of detailed information. You can have access to a great amount of specific purpose data in your management information systems. Yet, if the information you are accessing is unreliable, then your system is not doing its JOB. Therefore, if you are unable to rely on the data that you are gathering, I would encourage you to ignore this information and use other methods for making decisions.
An excellent collection system is essential for any care business. A good collection system will result in attracting and maintaining the best carers, and supporting patients to pay invoices on time. This will help to avoid payment delays early on, while doctor-patient relationships are forming. In addition to this, it will be vital for staff to know that their pay is regular and timely. Finally, if good collections practices are not established early in the development of a practice then it becomes very much harder to implement them later on in a practice’s development, after other operations have been set up.
Recruitment and collections systems working in perfect synergy must underpin the long-term success and financial stability of your practice.