Financial KPIs Every Medical Practice Should Track

Quality patient care is the heart of any medical practice, but for physician-owners, there’s also the business side to run. Financial key performance indicators (KPIs) can help owners understand how the practice is performing and identify areas that need improvement. While there are many metrics worth monitoring, some provide particularly useful insight into profitability and the financial health of the practice. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

Understanding Financial KPIs

Financial KPIs measure specific parts of a medical practice’s financial performance. Rather than looking at revenue alone, they help owners understand what’s affecting profitability and how efficiently the practice is operating. Tracking these numbers month over month is where practices see the most benefit. A practice might post higher revenue for the year and still lose ground if expenses grew faster. Reviewing KPIs on a regular schedule helps owners catch that kind of gap early, while there is still time to adjust staffing or purchasing agreements.

Industry benchmarks can also be useful, although comparisons should account for differences in specialty and practice size. A four-physician orthopedic group and a solo pediatric practice, for example, may have very different numbers.

What Financial KPIs Should Medical Practices Track?

Operating Profit Margin — Operating profit margin helps medical practice owners determine whether revenue growth is translating into higher profits. A practice may be seeing more patients and generating more revenue, but profitability can still decline if expenses are rising faster. Many practices are reporting this reality. 

To calculate the margin, subtract operating expenses from revenue, divide the amount remaining by revenue, and multiply by 100 to get the percentage. For example, a practice with $1 million in revenue and $850,000 in operating expenses has $150,000 in operating profit. That’s a 15% operating profit margin.

Owners should compare the margin against prior months or quarters. A declining margin may be a reason to take a closer look at staffing costs or changes in insurance reimbursement rates. Practice leaders should also note how physician-owners are paid, through salary or distribution, because that can affect the reported margin.

Overhead Ratio — How much does the medical practice spend on administrative and support functions? The total number is important, and the overhead ratio can put it into greater perspective. To calculate the ratio, divide overhead expenses by revenue and then multiply by 100. A commonly cited target for medical practices is 60% to 65%, although the appropriate percentage varies by specialty and which expenses are included.

Owners should compare the ratio against prior months or quarters and review individual expense categories when costs increase. The goal is to make sure the practice is using its resources efficiently and getting value from those expenditures.

Cost per Patient Visit — Cost per patient visit helps medical practices determine how much it costs, on average, to see each patient. It’s one way to measure operating efficiency. To calculate it, divide operating expenses by the number of completed patient visits during the same period. This information can then compare the results to the previous year and used for analysis.

If the cost per visit is increasing, there may be several reasons. Staff expenses may have increased, or maybe appointment slots are going unfilled. Even changes in the types of services patients need can affect the numbers. Identifying the root cause can help leadership decide what adjustments are needed.

Claim Denial Rate — When claims are denied, it delays reimbursement and generally creates more administrative work and costs for the practice. A commonly cited best-practice target is a denial rate below 5%. Those with higher rates should review the reasons for denials, such as missing prior authorizations or other paperwork issues.

To calculate this metric, divide the number of claims denied by the total number of claims processed during the same period. Then multiply by 100 to get the percentage. For example, if 50 out of 1,000 claims are denied, the practice has a 5% denial rate.

Net Collection Rate — Net collection rate helps medical practice owners see if the practice is collecting the revenue it’s entitled to receive. Insurance underpayments and unpaid patient balances are common problems that can reduce cash flow and negatively affect revenue.

To calculate the rate, divide the amount collected by the total amount the practice is entitled to receive and multiply by 100. A common target is collections of at least 95%, with 97% to 99% representing stronger performance. Owners should monitor this rate regularly and investigate declines.

Accounts Receivable (A/R) — While net collection rate measures how much revenue a practice collects, accounts receivable (A/R) helps owners understand how long it takes to receive those payments. There are two measures which can help management track performance.  

Days in A/R shows how long it takes, on average, to collect outstanding payments. It is calculated by dividing outstanding receivables by average daily charges. The lower the number, the better the collection rate. A general guideline is 30 to 40 days. A/R aging looks at how long individual balances remain unpaid, with particular attention to amounts more than 90 days old. A commonly cited best-practice target is to keep less than 10% of total A/R in that category.

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Financial KPIs can provide valuable insight into how a medical practice is performing. Before making a targeted plan for improvement these measures should be reviewed with an advisor, along with any other metrics that the practice is monitoring on a regular basis. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.