Q: How often should I write off delinquent patient accounts? How does that affect my numbers?
A: We’ve learned a lot managing over 250 practices and over $200 million in active Accounts Receivables (AR). Coming from a business consulting background, where I worked with Fortune 100 companies, I did not expect to see as much variability in accounting practices as I’ve seen over the 4+ years we’ve been doing OrthoFi.
In terms of how long you should let a patient go before dismissing and writing them off, data shows that the time to dismiss is at 180 days, with 60 days in inactive maintenance starting at day 120. See my column in Orthodontic Products’ September issue for more information on how we arrived at that. The question then becomes: when and how often should I scrub my books and take the write-off? I am not and do not claim to be a tax accountant, so I’m not advising you from a tax perspective. However, what I can tell you is that your routine on write-offs can often skew your metrics and your perspective on your collection performance. See the top chart below:
The practice shown (on our system since 2014) had not written off any meaningful bad debt in years. As a result, their collection rate was artificially high. However, their Delinquency Rate (% of AR dollars past 30 days) was steadily climbing, from 1.3% to nearly 2.5%. That was largely due to the fact that there was a building pool of accounts well beyond the 180-day delinquency mark. Effectively, since those accounts were not being written off, the delinquent AR total in the numerator can only increase, whereas the denominator of total AR will stay somewhat constant with the inflow/outflow cycle of active patient accounts. When they did finally write off their bad debt in September, their write-offs jumped up, and their delinquency rate dropped back down significantly. So they thought there was a growing problem with patient AR collections, when it was all in how they were accounting. Had they been writing off bad debt regularly, they would not have been so misled.
How can you avoid that? The short and easy answer is to write off bad debt monthly or at worst quarterly. At OrthoFi, however, we can’t count on over 250 of our practices to always comply with those expectations. To help us assess our performance and help our partners better understand their business, we continue to develop new metrics. In this case, we were looking for a set of metrics for both delinquency and collection rate that displayed a more accurate picture without relying on the discipline of the practice to write off bad debt.
The bottom chart is a reflection of these metrics for that same practice. The blue line (left axis) shows Net Recommended (Rx) Collection Rate. That is a rolling 12-month lookback of total production including interest earned (our clients earn interest from patients who select extended financing plans beyond treatment time) minus the total amount of actual default including those accounts beyond 180 days which have not yet been written off, all as a percentage of total production. That provides a clean view of what percentage of the net production you write is being collected, regardless of how often you clear the bad debt. You may be asking yourself why there is a dip in Net Rx Collection Rate that corresponds with the write-off jump above. In this practice’s case, when they went to write off their bad debt, they included a number of accounts that were well within 180 days which would not normally be written off in our recommended protocol. Since they are actual write-offs, they cannot be extracted from the calculation for accuracy. If they had stayed the course, the September number would have stayed steady and would have yielded a higher level overall across the adjacent months. Paired with that is the Active Delinquency Rate (right axis), which measures standard delinquency (% of AR dollars past 30 days) excluding balances beyond 180 days. Again, that clears away the noise of AR that is likely unrecoverable and that progressively clouds the picture on collections performance. Together, as you can see, it paints a much more accurate and stable view of actual performance.
So make sure that your metrics are accurate and actionable, and that they are telling you what is actually happening. If you don’t have access to new metrics like Net Rx Collection Rate and Active Delinquency Rate, you’ll want to make sure you are working with your financial and accounting team to create consistent discipline to write off your bad debt to clear that out of your conventional metrics. OP
About Inside the Numbers: Answers to questions submitted to Inside the Numbers are based on data collected by OrthoFi™, and presented by CEO David Ternan. The data pulls from 250,000+ consults and over 200,000 patient starts in over 250 practices, including patient demographics and preferences, risk profile, and payment performance on over $200 million in receivables. Inside the Numbers aims to help you make informed decisions about patient financing and to dispel myths that can hinder growth.
Submit your questions to Inside the Numbers at [email protected].