Accounts Receivable Management In Health Care Organizations
To increase profit in health care organizations, most companies usually allow the services to be done on credit. There were allowed with the high expectation that customer would pay incurred amount in due time. But there were also times when customers would not pay on time or not be able to pay at all, the expenses then would fall into the uncollectible accounts, or bad debts, and are a loss or an expense of selling on credit. (Smith et al, 1989, p.386)
So to avoid large amounts of bad debts, most organizations would set up a credit department. As written in Needles’ Financial Accounting, ‘this department’s responsibilities include the examination of each person or company that applies for credit and the approval or disapproval of the sale to that customer on credit.’ (p.289)
Accounts Receivable Management In Health Care Organizations Essay Example
He further expounded the job of the credit department that it should ask for information about customer’s financial resources and debts, check personal references and established credit bureaus which may have information about the customer. After the checking process, the department would then decide whether to sell on credit to that customer or not. But there were still certain limitations because they cannot be too conservative in giving credit, otherwise they may lose some important opportunity in business.
The balance between the acceptable level of credit losses and the potential profit on total credit sales must be reached, otherwise they would be charged against the sales revenues they helped to create, which would make the company unprofitable. As written by Davis Hartley Le Moine in his ‘Back to Basics: Collecting Accounts
Receivable’ column, he had stated that ‘The ability to apply the basis is absolutely essential to accounts receivable management. For some hospitals, gross receivables account for more than 20 percent of assets… Receivables have been growing at an alarming rate. According to HFMA’s (Healthcare Financial Management) Financial Analysis Service data, days in accounts receivable increased from 69.9 days in 1986 to 77.3 in 1989.’ (Le Moine, 1990) This meant that at that time, they are ineffectively using current assets, so there is the need to focus on the basics of collecting accounts.
Then, in 1993, Bill Hecht et al said in “Achieving Excellence in the Management of Accounts Receivable” that ‘hospitals will experience much difficulty in discharging their financial obligations unless they devote proper attention to accounts receivable management (ARM)…. A large percentage of healthcare centers were able to meet the 1993 target for days revenue in AR one year in advance, days of gross revenue in gross AR were reduced by 15 days, while patient revenues rose by 15%.’ (Hecht et al, 1993)
Dealing with the account receivable collection is not that easy, for it comes from an open credit arrangement in which the seller and buyer have a contract providing that the buyer will pay the seller for any goods and services purchased within a specified time, which typically is 30, 60, or 90 days. But, the buyer does not agree to pay any specific amount but to pay for whatever is purchased. So if the buyer later refused to pay, it would become a great problem. (Smith, p.356)
There are several approaches to liquidating the account receivables into current revenue. But, the method of prolonging the term should not be used or it would be illegal. First is the ARMT approach. It put much attention into the account receivable collection, such as setting up a collections department, performing periodic reviews of the healthcare centers’ progress in reducing days revenue in accounts receivable, advising the management on quality issues related to the accounts receivable life cycle, etc. They should take careful attention in billing information, thorough background check, and increased follow-ups. But, this would result in ‘increased number of patients who would receive uncompensated care, decreasing lengths of patient stays’(Hecht et al) and other related problems.
The other method is to convert account receivables into cash by securitization. According to Mark D. Folk as written in “Converting Accounts Receivables into Cash – Securitization”, ‘Securitization transactions became popular in the 1970’s with the development of mortgage-backed securities. Since then, the technique of securitization has been applied to securities that are collateralized, or backed, by an increasingly exotic array of accounts receivable, from simple credit card and car loan payments to foreign telephone receivables and oil and gas royalties.’ (Folk, 2004)
When applied to health care, it is still with the same principle. It is easier to use securitization in health care organizations, because most of the payers are large insurance companies and government agencies. ‘While some of these payers may pay their obligations slowly, the risk of nonpayment usually is small.’ (Folk, 2004) But there are some difficulties such as healthcare securitizations must be structured to conform to each payer’s distinct legal relationship with providers; and the complex legal requirements of the government programs such as Medicare, state Medicaid-type programs that are too many to follow or it would result in violations. Increasing numbers of providers have securitized their accounts receivable, although it may not be appropriate for every healthcare provider, it can provide access to a ‘new, lower-cost source of funding that they may be instrumental in securing a provider’s future economic viability.’(Folk, 2004)
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