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Accounting for Doctors

Accounting for doctors and medical practices

Health care spending is growing rapidly. The Centers for Disease Control and Prevention (CDC) estimates national health expenditure at roughly $3.8 billion annually — up 30% in inflation-adjusted dollars from a decade earlier. Self-employed doctors and independent medical practices play a critical role in the U.S. health care system.

The American Medical Association (AMA) reports that there are nearly 1 million active physicians practicing in various medical specialties in the United States. This translates to about one doctor for every 344 people.

While increased health care spending is driving up medical practice revenue, increased operating costs, reduced Medicare and Medicaid reimbursements, and pressure from insurers for patients to seek low-cost settings are reducing profits for doctors and medical practices. With financial pressures like this, comprehensive and accurate financial reporting systems are essential for your practice’s long-term success.

Medical practice accounting

Operating an independent practice offers many benefits, but accounting can be challenging.

In recent years, a growing number of independent medical practices have been bought by large corporate groups. Nearly three-quarters of physicians are now employees of a health system, a private equity firm, or a health insurer, according to the Physicians Advocacy Institute (PAI).

However, operating your own practice offers many benefits, including greater autonomy, enhanced work-life balance, and improved patient engagement, which often leads to higher quality of care. Many self-employed providers choose to partner with independent physician associations (IPAs) and accountable care organizations (ACOs) to collaborate with other doctors while maintaining their independence.

There’s one major downside to operating an independent practice: Accounting for a doctor’s office can be challenging. Independent practices often lack comprehensive in-house bookkeeping and accounting expertise, and many turn to external specialists for help with their unique operational and financial reporting challenges.

That’s where Padgett Advisors comes into play. We specialize in bookkeeping and accounting for doctors, including general practitioners and specialty medical practices.

Medical practice accounting

More than half of doctors are experiencing burnout, according to workforce data compiled by the Advisory Board. Of those reporting feeling overworked, 61% reported excessive bureaucratic tasks as the cause. We can help manage the financial side of your practice, reducing your administrative workload and allowing you to focus on the clinical aspects of practicing medicine.

Among other things, a well-designed accounting process can help your practice:

  • Make informed decisions;
  • Maximize profitability;
  • Distribute profits equitably among physician-owners;
  • Manage patient payments and third-party billing; and
  • Comply with applicable state and federal regulations.

Retirement and exit planning are becoming major issues for smaller practices. The median retirement age for doctors is 65. Today, nearly half of active physicians in the United States are age 55 or older, according to the Association of American Medical Colleges (AAMC). The statistics are even more pronounced in certain specialties. For instance, 92% of pulmonologists and 71% of pathologists and preventive medicine practitioners are expected to retire in the next 10 years. Having a viable plan in place helps maximize the return on investment for the retiring physician-owner and facilitates business continuity for those who continue to own the practice.

To learn more, reach out to your local Padgett office

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Outsourced bookkeeping

Tracking billings, collections, payroll, operating expenses, equipment purchases, and other financial transactions can be time-consuming for your office staff. Our bookkeeping specialists can handle these administrative chores directly for you on a weekly or monthly basis — or temporarily if your existing office manager unexpectedly leaves the practice.

The use of a trusted specialist in accounting services for doctors gives you the peace of mind of knowing that transactions will be recorded in the appropriate accounts with detailed, accurate descriptions. This can alleviate headaches when it’s time to prepare your year-end financial statements and income tax returns.

Preparation of monthly and year-end financial statements

Comprehensive financial statements include three reports 1) the income statement, 2) the balance sheet, and 3) the statement of cash flows. These provide an overview of your practice’s financial health.

We offer prepared financial statements that comply with U.S. Generally Accepted Accounting Principles. Alternatively, some small practices may prefer to issue cash-basis or tax-basis financial statements. We can help you determine what’s appropriate for your current situation.

Interim operating reports

Just like eating healthy and daily exercise isn’t enough to prevent disease, year-end financial reporting isn’t enough for most doctors’ offices to succeed. Effective accounting for doctors requires ongoing diligence. We can identify key metrics to help practice owners monitor financial performance on a real-time basis using weekly or monthly flash reports.
Common accounting and operating metrics for doctors and medical practices include:

  • Average number of patient visits/billing per physician;
  • Average medical assistant/nurse/lab technician work hours and time spent with patients;
  • Average wait time for scheduled patient visits;
  • Average billing per patient;
  • Patient no-shows/cancellations;
  • Average charge-posting lag time;
  • Composition of billings (direct patient payments vs. payments from private insurers vs. payments from government programs);
  • Average number of claims denials vs. overall claim submissions;
  • Cash and electronic funds transfer (EFT) receipts;
  • Available cash balances; and
  • Accounts receivables aging schedules.

Operating cash flows are the circulatory system of a medical practice. Cash inflows from billings are like the veins, bringing cash into the heart of the practice. It’s important to bill for all services rendered, including office visits and medical services, lab fees, medical supplies and equipment, medications and immunizations, and medical records provided by your practice. Cash outflows are the arteries, providing payments to your staff, labs, suppliers, lenders, and physician-owners.

Blockages in the cash flow cycle needs to be quickly diagnosed and repaired. We can help you optimize patient, Medicare, Medicaid, and insurance billing, providing support as you deal with the complexity that governmental programs and insurance bring to your practice’s cash flow.

High-tech equipment can be another costly expenditure for doctors, depending on their specialty. Acquiring new equipment or technology can help your practice expand the treatments you offer, improve efficiency, and increase patient volume. We can help evaluate these investments, including which tax breaks may be available and whether it’s smarter to buy or lease equipment — or to partner with third-party providers — in light of today’s rapidly advancing technology. If your practice includes more than one doctor, our team can also help allocate these and other overhead costs among your physician-owners.

Analyzing financial performance on a regular basis can help you maximize profits and identify practice inefficiencies. Interim reporting can also help you identify the need for a line of credit to temporarily cover operating expenses while you’re waiting to receive payments from patients and third-party payors.

Budgets and forecasting

Historical financial results may be used to project how your practice will perform in the future. We can prepare budgets and forecasts to help determine whether you have the office space, equipment, and staffing to meet future demand, as well as identify competitive threats and growth opportunities based on the needs of local patient population. These reports can also be useful when applying for bank loans or merging with another practice.
Throughout the year, we can compare your actual results to your budget. Such follow-up examinations can ensure your monthly billings and expenditures stay on track. Major deviations may require revisions to your original budget or corrective actions. It’s always better to find out this information early, rather than to wait until year end!

Financial benchmarking

The purpose of bookkeeping and accounting for doctors should extend beyond compliance with lending, regulatory and tax requirements. Most medical practices want to know how they measure up against other practices that serve your local patient population.

We can provide industry benchmarking data, based on your location, size, and specialties, such as those provided by the Medical Group Management Association, the AMA, the PAI, the AAMC, and local or medical specialty trade associations. These benchmarks can be compared to your financial results to determine operational strengths and areas for improvement. They can also help evaluate your cost structure and the competitiveness of your compensation packages.

Accounting software selection

Effective bookkeeping and accounting for doctors’ offices and medical practices requires more than Excel spreadsheets. Your practice needs specialized accounting software to track such items as:

  • Standard billing rates, insurance codes, and capitation plans for patient services;
  • Revenue and overhead share by owner (for practices with more than one doctor);;
  • Revenue and overhead share by owner (for practices with more than one doctor);
  • Accounts receivables and write-offs;
  • Patient contracts (where applicable);
  • Accounts payable;
  • Staff wages, benefits, and payroll taxes;
  • Supplies and materials;
  • Lab and testing fees;
  • Malpractice and general business insurance;
  • Costs of continuing medical education, state and local licensing, and professional memberships;
  • Rent, marketing, and other overhead expenses;
  • Equipment, leasehold improvements, and depreciation expense;
  • Commercial loans and interest expense;
  • Payments to and from shareholders; and
  • Tax-related information.

Updated patient records are critical to accurate billing and timely collections. This includes basic patient information, insurance details, treatment history, and consent forms. Billing errors — such as having the wrong insurance card on file or improper coding — can lead to disputes, denied claims, and delayed payments, which can erode profits.

Medical practice accounting systems also must be secure to protect sensitive patient personal and billing information. Hacked or stolen patient records can lead to financial losses and harm to your practice’s reputation.

There are several bookkeeping and accounting solutions for medical practices that vary in capabilities and cost. We can help you select a program that’s appropriate based on your size and specialty.

If you already have accounting software in place, it may be time to review it. For example, software that you selected when your practice opened may no longer be appropriate or a new product may have become available that’s a better fit for your current needs. We can help you assess your current software and evaluate alternatives to ensure you’re utilizing accounting software to its full potential.

We encourage you to contact us with any questions.

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