Cash Flow Forensics
Situation and Challenge
A health care provider was concerned that cash flow was declining despite the perception that nothing had changed in the operations of the practice. The owner was unexpectedly required to make a capital contribution to the practice to cover the shortfall. We were asked to perform a thorough analysis to determine the root cause of the recent declining cash flow.
As with most business, there were many factors which can affect cash flow, including production volume, revenue mix, collections, and expenses.
For medical practices there are the added complexities that payment can take up to 12 months to collect and the amount paid for a given procedure can vary significantly depending upon the class of insurance (such as Medicare, Medicaid or private insurance).
In the case of this client, several parameters which affect cash flow were in flux, including the amount charged per procedure, production volume, collection rate, adjustment rate and expense levels. It was not readily apparent which of these factors was affecting cash flow.
After a thorough analysis, we determined that the underlying cause of the decline in cash flow was a drop in production volume. A recent increase in the amount charged per procedure resulted in a constant level of gross charges and masked a decrease in the number of procedures performed.
We also determined that the net amount realized per procedure was relatively constant despite a change in both the collection and adjustment rates.
We determined that a drop in production volume was the root cause of the decline in cash flow. We forecasted a continued deterioration in cash for the next several months unless quick measures were taken to accelerate collections, reduce expenses or otherwise free up cash.
We suggested several initiatives to increase volume, including cultivation of the referral network as well as additional physician hours.