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By George V. Marino, CPA

Medical practices, in the past, have been accustomed to informal management accounting systems and financial reporting. Accounting has centered around the checkbook, payroll records, and tax planing and compliance for the physician owners. This is no longer acceptable.

Today, medical groups and physician networks are being asked to disclose a great deal of financial and operating information. The requests come from potential partners; Federal, state, and local governments; business coalitions; payers and potential payers such as insurance companies, and health maintenance organizations (HMOs); patients; and the media. New configurations in health care delivery require improved or advanced accounting systems. Such systems integrate operational and clinical factors into the accounting process, enhancing the basis for managed care business planning and providing relevant information for the practice's financial statements. In an advanced medical accounting and performance measurement system, sufficient financial information is maintained for compliance with GAAP, cost accounting, physician productivity evaluation, and managed care budget analysis. Accounting systems for medical practices, just like integrated health care, cannot leap to the "promised land" without moving through developmental phases.

The process often starts with poor financial and operating data, which forecloses the possibility of the preparation of meaningful financial information and statements, such as a compilation of revenue, expenses, and patient and payor mix data. Many medical practices are past this phase.

The next developmental phase focuses on compiling data for tax compliance, limited financial statements, and planning for physician owners‹the checkbook approach. During this phase, the accounting system consists of assembling essential financial accounting data, such as cash receipts, expenses paid, and payroll and business tax payments. The financial accounting data is independent of practice management data such as payor and procedure mix, coding, explanations of medical benefits (EOMBs), and utilization trends. There is a serious limitation on generating information for understanding medical practice business fundamentals

Phase Three

In the third phase of development, key clinical and operational data are incorporated into the accounting and reporting process, including the type and frequency of medical procedures; sources of revenue; trends in collection by major payers; provider practice patterns such as the number and dollar amounts of procedures for a given set of diagnoses; and data such as Federal, state and local health planning laws and regulations. Financial accounting information is maintained for the continuous production of external reports. The third phase includes the following ten- point managed care assessment program that creates and builds an economic model for costs, productivity, and managed care budgeting.

1. Conduct a comprehensive survey of the medical practice by reviewing financial management and budgeting, billing and collection, administration, personnel, and marketing programs. The exhibit illustrates the key issues to address in each area for medical practice operational improvement and the enhancement of the accountability of the practice to third parties. This survey should highlight both the strengths and weaknesses in the system and form the basis for an analytical review of financial ad operating data.

2. Evaluate practice fees by analyzing them against typical benchmarks. Obtain several EOMBs for major procedures and office visits for each of the major payers and managed care plans and compare payment and utilization trends to the practice budget. Review stop-loss (insurance) limits for capitation (fixed fee) arrangements by scheduling current procedural terminology (CPT) codes by patient to identify revenue and capacity implications. In the fee-evaluation process, schedule major CPT codes and their volume to determine the practice conversion factor, i.e., the number that converts relative value units (RVUs), which are used to measure the relative complexity of medical procedures and office visits, into fee schedule amounts, for each managed care plan.

3. Analyze the CPT system by comparing the practice superbill‹patient receipts with an indication of the service performed, the fee amount, and the CPT code‹against the most recently published CPT code book. Practice codes indicate what physicians did to treat patients, and form the basis for cost, productivity, and managed care budget systems which are the products of the next developmental phase in medical accounting systems.

4. Scrutinize billing and collections by testing the billing and collection process from the initial patient encounter through medical claim filing and third party payment or adjustment. Request from the billing department the practice day sheets, Health Care Financing Administration (HCFA) 1500 claim forms, superbills and patient transaction ledgers, EOBM forms, and medical records. In the testing process, document how the practice communicates with patients on billing issues, as well as, the use of encounter forms, fee disclosure contracts, and claim preparation procedures.

5. Review a sample of returned claims. What is the reason for each third party payor denial? Was a correction made and the claim form resubmitted within a reasonable period of time?

6. Test patient account receivable statements by reviewing for production, accuracy, and clarity. It is not uncommon for medical invoices to be overly complex and misunderstood by the patients. The resulting confusion creates problems for the medical practice staff, as well. Although educating patients about their health insurance coverage has not historically been the responsibility of a medical practice, it is essential to let patients know that in an HMO program their insurance will cover certain visits and treatments. A checklist that describes exactly what is covered by the managed care plan will facilitate this process.

7. Review remittances from major payors for denials, billing patterns, inconsistent payments, and coding errors. Compare this information to your fee evaluation worksheet in point 2 above.

8. Review payor mix collection ratios by examining the EOMB's included with third party payments. By reviewing the percentage of total revenue generated by each insurer/managed care organization, you can identify practice trends in payor mix and related service and revenue implications.

9. Analyze managed care mix of revenue by‹

    a. reviewing managed care contract terms such as services coverages, co-payments, penalty provisions and distribution of risk-pool amounts etc.

    b. measuring physician productivity in both fee-for-service and managed care environments by tracking RVUs, which are made up of three components, the complexity and intensity of physician procedures, practice overhead, and malpractice insurance.

    c. identifying and responding to unused capacity in the medical practices by comparing RVU's against referenced benchmarks for a particular specialty.

    d. providing additional information for quality assurance and utilization review monitoring.

    e. reviewing physician income distribution formulas by comparing various departments and/or specialties. In the analysis, consider the mix of services, payor categories, and regulatory issues.

10. Develop a cost accounting system, classifying costs according to their behavior patterns in the general ledger. Select a method for allocating costs of services in a reasonable manner. Determine the cost of each major medical service or procedure and calculate your internal cost per member per month for each capitation arrangement.

Phase Four

In the fourth developmental phase, there is an integrated accounting and performance measurement system that reconciles data generated in phase three so that financial statements and disclosures are reliable, timely, and useful.

Performance measures such as procedure cost data, individual provider RVU production data, and budget data are linked to the general ledger. Medical practices cannot bypass the phase three 10-point managed care assessment program in order to reach a phase-four managed care accounting system. Phase four systems address both the discounted fee-for-service and capitation components. To determine the profitability of both components, revenue and expense information are allocated to both segments. There are major differences in accounting for each segment, the more prevalent are as follows:

* Capitation revenues are recognized in the time period services are made available to health plan participants. In the fee-for-service component, revenue is recognized when services are performed.

* Accounting for expenses such as referrals to physicians outside the network are expenses of the medical practice, not the patient, unless the services are not covered by the capitation contract.

* When allocating expenses to physician procedures, treatments and services should be divided between both components. While patients in a discount fee-for-service-component are revenue centers, patients under a capitation arrangement are viewed as cost centers. Medical accounting systems need to trace direct and indirect costs, and allocate such costs to prepaid patients (under a capitation arrangement) on a CPT code basis. *

George V. Marino, CPA, is a medical practice managment consultant with Gettry Marcus Stern & Lehrer, CPA P.C., in New York.


Michael Goldstein, CPA

The CPA Journal





1. Accounting system

2. Productivity system and RVUs

3. Cost management system

4. Budget

5. Financial statements

6. Management information

7. Cash flow

8. Fees

9. Insurance

10. Utilization of equipment

11. Supply and equipment purchasing


1. Billing information

2. Special procedures

3. Billing system

4. Charge and receipt entry

5. Internal controls

6. Billing write-offs

7. Patient billing

8. Claims processing

9. Explanation of benefits

10. Credit and billing policies

11. Insurance claims follow-up

12. Credit follow-up

13. Credit balances


1. Partner/shareholder agreements

2. Prerequisites and benefits

3. Goals

4. Planning process

5. Management structure

6. Productivity

7. Peer review

8. CPE


1. Administrative responsibility

2. Policy and procedure manual

3. Office space

4. Patient records

5. Record retention

6. Appointment scheduling


1. Organizational chart

2. Job descriptions

3. Qualifications

4. Salary levels

5. Personnel policies

6. Fringe benefits

7. Performance appraisals


1. Overall plan

2. Managed care

3. Market research

4. Referrals (if applicable)

5. Potential referrals

6. Promotional activities

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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