TSI White Paper Dental

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Dental Practice Accounts Receivable: Putting Your Money Where the Mouths Are.

Accounts receivable turnover--the average amount of time that it takes a patient to pay outstanding invoices—is an indicator of your practice’s financial strength. It’s also used by banks and other financial lenders, when a practice is seeking the necessary capital and equipment to expand or make improvements aimed at better serving your patients. While most practices understand the importance of keeping receivables current, when it comes to actually collecting past due balances, efforts often fall short and can place the practice on precarious financial footing. This paper presents a strategy for preventing receivables from careening out of control as well as collecting existing past due balances.


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TSI White Paper Dental

  1. 1. Transworld Systems White Paper Dental Practice Accounts Receivable: Putting Your Money Where the Mouths Are January 2010Introduction
  2. 2. Transworld Systems White Paper - Dental Practice Accounts Receivable: Putting Your Money Wherethe Mouths AreIntroductionAccounts receivable turnover--the average amount of time that it takes a patient to payoutstanding invoices—is an indicator of your practice’s financial strength. It’s also used bybanks and other financial lenders, when a practice is seeking the necessary capital andequipment to expand or make improvements aimed at better serving your patients. Whilemost practices understand the importance of keeping receivables current, when it comesto actually collecting past due balances, efforts often fall short and can place the practiceon precarious financial footing. This paper presents a strategy for preventing receivablesfrom careening out of control as well as collecting existing past due balances.Accounts receivable turnover ratio: the higher the better.This ratio can vary from two or three to as high as twenty, depending on your monthlyrevenue and the speed at which you collect. This is truly a measure of your cash flow—your ability to convert receivables into cash. Therefore, the higher the ratio, the better yourability to collect and the greater your cash flowIt’s a simple formula: revenue/receivables = turnover (BNET.com). For example: if youraverage revenue is $100,000/month and your average receivables is $35,000, then youraccounts receivable turnover ratio is approximately 2.85 ($100,000/$35,000 = 2.85). Asyou can see, to increase the ratio, you would need to increase revenue, decreasereceivables or both. As a business owner, you must ask yourself what the return will be todecrease receivables for example, by investing in added staff or turning over thecollections function to a third party agency.Are you compromising patient goodwill or financial stability?There’s a fine line between maintaining patient goodwill and financial stability. One shouldnot be compromised for the other. However, one indicator of the health of a practice is itscash flow.Cash flow and customer goodwill are linked. Cash flow impacts your ability to effectivelyservice your paying patients. Typical dental practices don’t actively pursue outstandingbalances until they reach 90 days aging. According to a U.S. Department of Commercestudy, nearly 30% of accounts at 90 days aging will not be paid/collected. Allowingaccounts to lapse too far into 60- or 90-day aging not only puts your practice at risk, butalso the quality of service you provide your paying patients. Are you compromising servicelevels provided to paying patients by tying up your already stretched administrativeresources to chase debt that will likely not be paid? Additionally, are you cutting into yourprofits by paying part-time resources to collect the uncollectable?When it comes to receivables, the old adage—“an ounce of prevention is worth a pound ofcure”—applies. Most small to mid-size practices lack the staff to adequately pursuebalances, especially balances that have gone beyond 90 days. Furthermore, the staff is© 2010 Transworld Systems Inc. 2
  3. 3. Transworld Systems White Paper - Dental Practice Accounts Receivable: Putting Your Money Wherethe Mouths Aretrained to add value to the practice by providing outstanding patient administration such asprompt scheduling, estimates, billing, etc. Chasing after delinquent accounts is not a valueadded service when it doesn’t result in recovery of past due balances, which is often thecase. Even with a traditional third party collection agency, the average rate of collection isapproximately 15%, of which the practice only receives approximately 70% (AmericanCollectors Association).Having an effective accounts receivable policy can have a more positive impact on patientgoodwill and retention than allowing accounts to lapse into aging. A patient with anoutstanding balance is less likely to keep up with routine dental appointments. If they havean urgent need, they’re more likely to go to another dental provider where they will nothave to pay their delinquent account before receiving services. The more current thepatient’s account, the more likely the patient will be to follow consistent dental care.The following section outlines several tactics that will help you preserve patientrelationships while protecting your profitability.Eight ways to increase accounts receivable turnover ratio.There are a number of tactics that practices can implement right now that will ensureprompt payment and avoid alienating patients or sacrificing potential referral business.Many of the following tactics will not only increase your cash flow, but also streamline thecollections process. 1. Implement clear, concise payment and collections policy including: a. Make sure patients understand upfront that payment is due when services are rendered. If they are unable to pay in full at the time services are rendered, determine the payment plan up front. b. Allowable forms of payment: cash, check, money order, and credit cards. c. Broken appointment charge and policy. d. Note that patient is responsible for total charge. We do not look to a third party for payment. e. Office policy on insurance assignment. Full fee due now or just estimated deductible? f. Maximum number of payments allowed? Promissory notes or Truth in Lending forms? g. Interest, billing or service charge - rate and when applied. 2. Train staff to diplomatically explain and enforce payment and collections policy including: a. Always ask for payment when services are rendered, even if the patient can only make a partial payment. Do not offer to bill the patient later.© 2010 Transworld Systems Inc. 3
  4. 4. Transworld Systems White Paper - Dental Practice Accounts Receivable: Putting Your Money Wherethe Mouths Are b. Avoid open ended questions when it comes to payment. Don’t say, “How much will you be paying today, Mr. Smith?” Instead, approach with the mindset that full payment is expected, and if the patient says they’re unable to pay in full, then offer the other forms of payment such as credit card or financing based on your policy. c. Often a simple upfront reminder of your payment policy at the time the appointment is made or when an estimate is provided can increase the likelihood of securing payment. In some cases and depending on the practice’s monthly revenue, having a dedicated resource to handle the financial end of the business is more efficient and cost effective. d. Know your legal rights and patient rights covered under the Fair Debt Collection Practices Act and the Consumer Protection Act. 3. Accept several forms of payment including credit cards and financing to gain more upfront payments. 4. When it comes to appliances and other laboratory related services for which the practice must pay, always obtain at least a portion (30% or more) of the amount due up front from the patient with the balance due upon final work. 5. Verify patient contact information upfront and keep records up-to-date with subsequent appointments or calls. 6. Be proactive! Don’t wait until an account is 60 or 90 days past due to make the first contact. Run monthly aging reports to gain a snapshot of your accounts receivable. a. Make your first contact after the 30-day mark. It doesn’t have to be a cold, stern collections letter. There are diplomatic, friendly reminders but the reminder should always ask for payment in full by a specific date. 7. Avoid the expense of sending statements as a means of collecting. Remember, the best opportunity to collect is while the patient is still in the office. However, if you need to send statements, then don’t send more then three. If you haven’t received payment after the first or second contact, then sending additional statements will not be fruitful. Also, optimize your statements to ensure payment. Avoid sending aging dates and the total amount due. Instead, include payment options, the amount due and always include a due date. 8. Outsource collections a. Turn over past due accounts to a conventional collections agency for a range of approximately 30 cents on the dollar of the amount collected (American Collectors Association). b. Apply a third party web-based collection services that allow you to retain control over your accounts while they handle the work of sending collections demands for a low, flat fee. There are collection agencies that specialize in dental collections. They give the practice assignment options that can include: deciding on the intensity of the collection effort warranted on each© 2010 Transworld Systems Inc. 4
  5. 5. Transworld Systems White Paper - Dental Practice Accounts Receivable: Putting Your Money Wherethe Mouths Are account placed, the ability to add collection fees to outstanding balances, web-based reports and “thank you” letters sent to patients who resolve their accounts to your satisfaction.Are you a dental practice or a lending institution?Allowing patients’ accounts to slip past 30 days is in effect lending money by extendingcredit. There’s nothing wrong with extending credit if your office policy permits and yourstaff has the bandwidth to manage, or you outsource to a third party financing company.However, extend credit intentionally, up front and not as a result of allowing the patient’saccount balance to lapse into 60- or 90-day aging.Many practices extend credit unintentionally, creating an accounting backlog that must beaddressed by a staff already burdened with the daily activities of running the practice. Thestaff is often not trained in effective credit and collections processes and their attempts tocollect past due balances not only end in frustration, but also don’t produce results.While most practices prefer to manage patient relations directly, they turn over accounts totraditional collection agencies only after the accounts have reached the 90- to 120-dayaging. At this point, data indicates that 30% will not pay (U.S. Department of CommerceStudy). Recovering receivables is like recovering a stolen car… the sooner reported, thegreater the likelihood of recovering.The cost and opportunity of outsourcing collectionsThere are two options for collecting past due accounts: (1) percentage-based collections inwhich a percentage of the amount collected is retained by the agency. An average rate is30%; (2) flat fee-based agencies which collect past due balances and charge a fixedamount per account placed.With percentage-based agencies, practices do the upfront work of initial collecting. After allattempts to collect have proven unfruitful, the collections agency takes control of thecollections process and the practice pays a commission on the amount collected. Theprocess is often more aggressive and much less emphasis is placed on patient relations.A flat fee-based agency provides web-based tools and services that allow the practice tomaintain as little or as much control as desired. The emphasis is on maintaining patientrelations early on in the aging with diplomatic tactics that typically produce results withoutalienating patients and usually on the first contact. A more aggressive approach can beinvoked for older balances and only those that the practice, not the agency, chooses.The disadvantages of outsourcing collections include:  Cost o Percentage based collections makes budgeting less controllable. However, flat fee-based agencies provide more control over costs since you know the fee up front.© 2010 Transworld Systems Inc. 5
  6. 6. Transworld Systems White Paper - Dental Practice Accounts Receivable: Putting Your Money Wherethe Mouths Are  Potential for alienating the patient o Patients might be upset if contacted by a collections agency that is not diplomatic in nature. However, flat fee-based agencies provide greater diplomacy when used early on (around 60 days aging) and often their first contact produces results.  Losing control over the process o Some practices prefer to defer control to a third party, making percentage- based agencies the preferred choice. However, percentage-based agencies base their level of collection effort on the balances of the accounts. This can be a disadvantage for dental practices because of comparatively small balances. o Others prefer to turnover the collections work while retaining control of the patient, making flat fee-based agencies a more appropriate choice.On the other hand, outsourcing collections provides:  Greater impact because collections is coming from a third party  Possible implications for patient’s credit rating  Removal of the dentist as the “bad guy”ConclusionThe overall health of a successful dental practice is often indicated by cash flow. Accountsreceivable turnover ratio is a measure of how well the practice is collecting its accountsreceivable. A low accounts receivable turnover ratio can indicate poor cash flow and placethe practice at risk. Whether a practice uses its own staff or outsources collections, thesooner the attempt to collect, the greater the probability of recovering the balance. Withthe right policies, processes and outsourced partners in place, practices can maintainbetter control over their accounts receivable and cash flow.About Transworld Systems Inc.Transworld Systems Inc. ®, a wholly owned subsidiary of NCO Group, Inc.®, is an industryleader in profit recovery with headquarters in Santa Rosa, CA, and more than 100 officesthroughout the United States and Puerto Rico. Transworld and its service brandGreenFlagSM Profit Recovery are redefining the collection industry by providing businessesand medical organizations with better tools for recovering bad debt and past due accounts.Transworld has collected $2.4 billion over the past 5 years for more than 60,000 clients. Inaddition, Transworld Systems specializes in the dental market throughout the UnitedStates and has recovered $121 Million for over 10,000 dentists. For more information, call1.888.446.4733 or visit www.transworldsystems.com.© 2010 Transworld Systems Inc. 6

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