When creating a budget for your practice, it's vital to know how much income you are receiving. It's even more important to know how much of it is available to spend. That's why you need to track you your production, adjusted production, and collections KPI's for the most accurate numbers.
Let's do a quick review of how income trickles down into your practice and at what points you should be tracking it. This is important because of the role adjusted production plays.
Gross production is your baseline; it's what you quote patients and base your goals off of. The production part is because you've performed a procedure...so you've produced it.
After your gross production comes your adjustments. Adjustments/write-offs are money that is not able to be collected and gets removed from your gross production. This is why you don't base your budget off of your gross production. Adjustments vary, but they are generally debits or credits applied to the production. Examples of these are: cash discounts, family/friends discounts, miscellaneous adjustments, professional courtesy, and insurance adjustments.
Gross Production - Adjustments = Adjusted Production
Money that will never come into the practice is the adjustments from your gross production. It went out of the practice via an adjustment line item. However, overhead still needs to be accounted for and a bill will still need to be payed. If the patient isn't going to pay for it, then that poses the question: who else will pay for it?
Overhead for the procedures produced (gross production) still needs to be paid for by the practice. Therefore, the adjusted production is all the money that the practice is able to collect and budget with. This number is what you can hypothetically budget from and how your practice will pay for the overhead from procedures.
Adjusted production is the money you should plan to get paid for, not necessarily what you will get paid for...but is a more accurate number then your gross production.
What are your collections after adjustments?
How much are you collecting after adjustments? You can't collect 100% of gross production money unless there were no adjustments. So, you cannot compare gross production to collections. You will need to compare collections to what actually could be collected, which is done by comparing it to the adjusted production.
The industry accepted benchmark for collections is 98% when compared to adjusted production. If you're finding that 98% of collections from adjusted production is not sufficient to cover overhead, even though you are hitting your gross production goals, you have a problem. Are you adjusting so much that your adjusted production is not sufficient to pay the bills? If you are adjusting too much from production, it might be time to renegotiate with your insurance companies.
How much do you need to produce in order to collect and cover all overhead expenses? If you know your average adjustment percentage of what you are removing from the gross production and the percentage of what you collect, then you will know the gross production number that you need to hit in order to pay for overhead via your forecast.
The formula for adjusted production and the collections percentage is:
Gross Production - Adjustments or Write-Offs = Adjusted Production
Adjusted Production/Collections = Collections Percentage
You should also be working towards reducing your overhead when possible. Overhead are expenses like: payroll, lease payment, electric bill, supplies, etc. That's why you must monitor your KPI's so that you can see where your budget is not working.
Why is your adjusted production so important?
Tracking your adjusted production, essentially, is important because it's the middle man. It shows how you got from gross production to collections. It will also indicate if you need to change your process for receiving collections. If you are expecting a certain amount based off your adjusted production and receive less then 98%, you know your process needs to be updated.
Your adjusted production is your most accurate metric to compare your collections to. A goal that you should have is to be able to project what percentage of your gross production is going to become collections via your adjustments and adjusted production. This means that you have regimented your adjustments instead of just giving discounts when it suits. Your bank account will thank you for this at the end of the month. If you reduce your overhead, it can give more room to have adjustments and keep your patients coming back. In turn, your practice will grow including your overall revenue!