Accounts receivable management

Abstract

Health care investment in accounts receivable constitutes a very large percentage of total assets. The typical hospital will maintain approximately 60 to 70 percent of its total current asset investment in the receivables area. The increasing emphasis being given to return on equity and return on total assets in the health care industry has made the reduction of receivables a prime management objective. Financing this heavy investment in receivables entails significant costs for health care providers. Holding large values of receivables either involves short-term borrowing costs or lost investment returns from otherwise available equity capital. Increases in general rates of interest have magnified these costs. Effective receivables managment can also accelerate and increase organizational cash flow. Some estimates indicate that a reduction of just five days in receivables could provide a one-time increase in operating cash flow of 20 percent. Permanent increases in cash flow are also possible through improvements in billing and collection practices. It is difficult to estimate the revenue losses that occur because of lost charges, but the amounts on a national basis might be staggering. Improvements in collection practices could also greatly reduce revenue deductions for bad debts and charity care, thereby increasing cash flow. The issue provides an integrated analysis of the entire accounts receivable management process for both inpatient and outpatient service areas. The potential benefits and disadvantages of electronic data processing are also discussed with emphasis on critical interaction points.