This question is slightly off topic, but what percentage of the amount billed do you actually collect? I'm sure that payors vary, but if you generate $150,000/month, how much do you expect to collect in A/R? I've heard it can vary widely and it would seem that this is a bigger issue than overhead. What about the amount not collected? Can it be written off as lost income?
Contractual write-offs are not tax deductible - otherwise you could charge $1,000,000 per visit and write off your entire annual income after a few $25 visits.
The important thing about collection or overhead ratios is to understand how these simple ratios reflect complex situations and can cause misperceptions.
The indicator you want to watch is the collection rate
after contractual write-offs. If you charge $100 for an office visit and get paid the contractual rate of $50 then your collection rate is 50%. If you charge $150 then your collection rate looks worse at 33%, but
after contractual write-offs your collection rate is actually 100% in both cases.
If you should be getting $50/visit but are only getting $40 something is wrong. Most of the deficits in A/R are the deadbeats who don't make their co-payments. Occasionally you might have a carrier who is downcoding, slow, or otherwise breaching the contract but this has gotten less common since all of the successful RICO litigation and the passage of tighter insurance laws. Make sure that your billing software allows you to enter the fee schedule for each payor and that it pops up a message (or otherwise lets you know) if the payment entered is less than the fee schedule says. So if Medicare is supposed to pay you $100 for 62311 and your billing person enters a payment of $90 the program should raise a fuss about that.
Overhead optimization is very complicated. I have seen practice overheads at 40-60% because not all practice enhancements add the same amount of income-generating "efficiency" to the system. A practice with 60% overhead may be better than one with 50%. If you add something to the practice that has a lower profit margin than what your practice is currently doing then the overhead ratio will go up, but as long as your bottom line goes up too (without too much hassle or time commitment of course), who cares? What actually matters is whether the increased overhead translates to a bigger number on the bottom line.
For instance, suppose you are grossing $500K and have $200K overhead, which comes to 40%. You figure if you hired a RN to do the 5-minute med checks and pump refills you could see more new patients per week and increase your net income. So you hire a RN that costs you $50K in salary, taxes, and benefits, and that enables you to kick up collections by $80K per year. The nurse does not generate money as efficiently as you do - adding the RN returns $80K on a $50K layout, which means her overhead is 63% -way higher than your current overhead. Adding the nurse means your overhead is now up to 43%, but you are now making an extra $30K/year.
One important factor to bear in mind is that you must set your fees high enough to capture the highest payer. Many doctors don't set their fees high enough because it will make the collection rate look bad. Often this is the result of bad advice from whoever is doing the billing. They are afraid if you set the fees too high and then have a 20% collection rate you will be angry and change to someone else. However, since you now know that the true measure of billing efficiency is collection rate
after contractual write-offs you can reassure your billing person that you will be looking only at that number.
Here's why I am beating this point to death: If you set your fees at 150% of Medicare to make your collection rate look cosmetically appealing but there is a payer that pays 160% of Medicare for a certain procedure you will be charging less than they are willing to pay. You will be leaving money on the table. That means setting your fees higher - probably 200% of Medicare - which will make your raw collection rate look terrible. However, your collection rate
after contractual write-offs will be the same.
