Whether learning about the anatomy of the eye, various diagnoses, or procedure names, ophthalmology practice staff members absorb something new every day. However, with the exclusion of the practice administrator, bookkeeper, and billers, most clinical staff rarely receive any formal training on the financial management of the practice.

The goal of this article is to explain several important ophthalmic business terms and concepts for team members who do not have a strong economic background. By becoming familiar with these concepts and terms, nonfinancial staff members can develop a better professional perspective and understanding of how practices operate. In addition, raising the level of awareness on these topics may help all ophthalmic professionals better determine how they contribute to the financial health of the practice.

Revenue cycle management

The ability to work cohesively as a team is one of the most important elements in a successful ophthalmology practice. This is especially evident regarding the concept of revenue cycle management. Revenue cycle management is any business or clinical function related to capturing revenue (or payment) for a performed service. In other words, this concept encompasses the entire life cycle of a patient, from scheduling an appointment all the way through receiving payment, whether from an insurance carrier or a patient. Every member of the staff touches the revenue cycle at some point during the day-to-day operations of the practice.

Here are just a few (of many) examples of the revenue cycle management roles that team members play:

1. Front desk: Must accurately capture patient registration information, verify insurance, and collect patient co-pays.
2. Clinical department: Must document the chief complaint and accurately bill for tests performed.
3. Billing department: Must submit error-free claims, manage accounts receivable, and post payments in a timely manner.

Again, these examples represent only a few small snapshots of the many steps in the revenue cycle management process. From a revenue perspective, every step can be considered equally important, as any breakdown in the process can put the practice at risk of not getting paid or coming under unwanted scrutiny from Medicare or other third-party payers.

Gross charges, contractual adjustments, and collections (revenue)

Understanding the difference between charges and collections is an important part of the revenue cycle management process, as it allows for the proper handling of questions from patients.

1. Gross charges: This is the total amount that a practice charges for a service, based on its fee schedule.
2. Contractual adjustments: After a practice submits its gross charges to an insurance company, the insurance company pays the practice the contracted rate for the service. A contractual adjustment is the difference between gross charges and the amount the insurance company pays the practice. In other words, the gross charges of the claim are reduced by the practice’s contracted rate with the insurance company.
3. Collections: Collections (or revenue) refers to the actual money received from insurance payers or patients for the particular service. Ideally, collections represent the difference between gross charges and contractual adjustments.

Accounts receivable (AR)

AR is the balance due on services that the practice provides. After the practice performs a service on a patient, the billing staff submits a claim to the insurance company and, based on the allowable amount (see above), a specific dollar amount is due.

From a management perspective, AR is usually managed based on time intervals, such as the number of days since the initial billing of the rendered service. The AR time intervals are typically broken out as such: 0-30 days, 31-60 days, 61-90 days, 91-120 days, and over 120 days (from the date of service). The ultimate goal of any practice is to be paid as quickly as possible (0-30 days) for its services, because the likelihood of getting paid decreases as the number of days-after-service increases.

Income statement

The income statement (commonly referred to as a profit and loss statement) provides a summary of practice revenues and expenses for a given period (such as the prior month, quarter, or year). It is one of the main financial statements of any business. When properly formatted, the income statement is one of the most useful reports practice owners and administrators have to determine profitability.

One of the best ways to think of an income statement is to relate it to your household budget. Revenue would be akin to your take-home pay from work, while expenses would include your bills (i.e., rent, mortgage, utilities, groceries, or car). Each month, you receive an expected amount of revenue (pay) while some of your expenses are fixed — that is, the same amount each period (such as rent) — and others are variable based on how much you spend (groceries). Because you personally control your household budget, it is important to always be mindful of changes in revenue and expenses to make sure that you are within budget and meeting your household cost obligations on time.

This concept is similar to how a practice income statement works. One of the most significant differences, however, is that revenue can fluctuate significantly each month based on environmental factors (such as patient volume, time of year, or changes in reimbursement levels). These factors highlight the importance of being mindful of every part of the revenue cycle management process, which includes closely monitoring the practice’s accounts receivable.

Where do you fit into the revenue cycle?

While this article introduces only a few of many important financial management topics that impact a practice, developing a better understanding of financial processes and terms allows all staff members to better determine how they may influence the revenue cycle management process. When meaningful progress is made in overall financial understanding by the entire staff, the likelihood of a practice remaining financially healthy increases exponentially. OP

Mr. Maller is a consultant with BSM Consulting, located in Scottsdale, AZ. A financial benchmarking specialist, he assists in the development of a wide variety of practical practice management tools and resources for BSM clients. Contact Mr. Maller at amaller@bsmconsulting.com.