Possible Early Warning Signs of Practice Financial Problems
For those that know me, you know how much I preach about the importance of
implementing an ongoing monitoring program for any physician medical practice. This
monitoring can be conducted by practice administration, physician management, or
independent advisors. As I mentioned earlier, I suggest a combination of both – i.e. a
team approach to management.
A good monitoring program should detect financial “problems” early so that they can be
corrected “now instead of later.” The following is a list of warning signs you should be on
the look out for as part of any monitoring program.
Sudden change in accounts receivable tendencies
You should watch accounts receivable extremely closely. Benchmark what is "normal" for
the practice so you can better recognize any irregularities. Each month, prepare or print
summary accounts receivable reports showing comparisons over several months. In
particular, look for either a significant drop in receivables (signaling a possible drop in
production) or a steady increase in receivables over 90 days old. Also remember that
comparing today's figures with last year's numbers shows which direction you're
Abrupt changes in charges, adjustments and receipts for an individual provider
If you notice a big jump or drop in these monthly totals - especially for two months in a
row – you must investigate and find out why. It might just be a simple "bump in the
road," (i.e. physician time off) but it could indicate serious underlying problems. For
example, a continued increase in contractual adjustments could be the result of a change
in payer reimbursement or even worse, an indication of potential employee
Late charges or other penalties
If the practice is getting assessed late charges or penalties, it could signal a cash flow
problem. Is the practice paying bills on time? What does an aging of the accounts
payable look like? Look at bank statements, too. Overdrafts or returned checks indicate
critical problems. The bottom line is this: If a medical practice cannot pay its vendor bills
within thirty (30) days, then there is a problem somewhere!
Sharply rising overhead costs
Despite a practice’s best cost-cutting efforts, overhead should continue to rise as the
consumer price index slowly rises. Therefore, you should monitor practice expenses
closely by categories like personnel, facility, office supplies and medical supplies.
Compare costs from month to month and from year to year. On the other hand
remember that overhead percentages are based on revenues – if revenues are declining,
the overhead percentages might be inflated.
Finally, make sure information needed to run the practice is being made available on a
timely basis each and every month. This includes data and statistics on billing,
collections, accounts receivable, payer reimbursement, and the practice financial
statements. All of this financial information must be reviewed and discussed in a
monthly meeting forum. If financial information is late or is being withheld, this could
be an early warning sign of trouble.
Reed Tinsley, CPA is a Houston-based CPA, Certified Valuation Analyst, and healthcare
consultant. He works closely with physicians, medical groups, and other healthcare entities with
managed care contracting issues, operational management, strategic planning, and growth
strategies. His entire practice is concentrated in the health care industry. Please visit