August 2009

Leaky Revenue—Capturing Discounts and Missed Charges
Karen E. Felsted, CPA, MS, DVM, CVPM

Abstract:

It is not uncommon for 5-10 percent of gross revenue to be lost via discounts or missed charges in the average practice. Periodic review of discount programs and ongoing medical record audits are essential to managing this revenue drain.

Article

Most practice owners and managers don’t realize how much revenue quietly leaks out of their practice every week. One of the most significant causes is the discounting of services to clients. While practices may consciously realize they are discounting some of their fees; they very rarely know the full extent of it. A second major cause is work performed but never charged to the client. While the net effect on profits of both discounting and missed charges is the same, the causes are different and therefore the necessary corrective action is different.

“Discounting” is the deliberate reduction of fees charged to clients from what is stated in the fee schedule. It may be a partial discount or a 100 percent discount - either way the doctor or staff member is consciously deciding to reduce the fee for the services that the client received.

“Missed charges” happen accidentally (or sometimes, accidentally on purpose). For one reason or another; services performed for a client aren’t included in the client’s invoice. Often this is because the practice doesn’t have good systems in place to capture charges.

“Discounting” is not automatically a bad thing. A practice may choose to have certain kinds of discounts in place as an employee benefit, a marketing tool or as a contribution to the community. However, it is critical that the practice periodically review all discounts and make sure they are still accomplishing the intended goal. Reviewing them also helps the practice understand the financial ramifications.

The first step in reviewing the practice’s discounts is to identify the kinds of discounts being used in the practice. Common ones include those for senior citizens, multiple pets, breeders, and bundled services. (Many practices offer employee discounts as well but these won’t be discussed in this article because the basic intent behind them is different from that behind other discounts. Employee discounts should be reviewed and managed as a part of the compensation and benefits system.) There also may be a list of certain individual clients in the practice who receive special discounts. Additionally, in many practices, there are a large number of other random discounts given to individuals for reasons that are not specifically allowed by the practice. All discounts for groups of clients or for individuals should be reviewed to see if they are accomplishing the goals the practice has for that discount. For example, if the practice gives a free exam to everyone who purchases a puppy at a local pet store in order to build its client base, is this really working? Is the practice actually getting and keeping these people as clients? Does the prior owners’ second cousin once removed still need to get a discount?

In addition to reviewing the types of discounts and the intent behind them, it is also necessary to look at the dollar amounts involved. According to AAHA’s “Financial and Productivity Pulsepoints,” the average dollar amount of discounts in 2007 was 2.6 percent of total gross revenue, up from 2.3 percent in 2005. Unfortunately, the amount captured by the practices’ invoicing system is almost always understated and sometimes by a significant amount. The software system can only capture discounts that are entered as such. Ideally, if the practice is giving the client a discount it would show up on the invoice in some fashion similar to that shown below:

However, if the fee was just changed in the computer for this particular invoice or put in as a miscellaneous or onetime charge of $25, no discount will be tracked by the system. And, of course, if a charge is accidently left off the invoice entirely, the software system can’t capture it as a discount. In many practices, it is not uncommon to see 5-10 percent of the practice revenue lost via the combination of discounts and missed charges.

Discounts can have a significant impact on the bottom line; more than most practice owners realize. For example, let’s say the average # of transactions per doctor in a particular practice is 5,000 with an ATC of $100. If 10 percent of the transactions are discounted by 10 percent, that will reduce the net profit by $5,000. This may not sound like a very high number but, assuming a 20 percent profit margin, the practice will need to see 250 more patients just to bring the profits in the practice back up to where they were before the cases were discounted.

A medical record audit is the only way to catch missed charges and to find many discounts not recorded in the invoicing software. To start, pull the medical records for 30 cases per doctor—this should be a mix of initial appointments, rechecks, and hospitalized cases. Compare the services provided to the client as documented in the medical record with what was charged on the invoice. Capture the results of the audit on a chart or a spreadsheet with the following items included: patient name, date and time of appointment, amount of invoice, type of appointment (surgery, hospitalization, outpatient) doctor, date, technician (if known), receptionist (if known) and information about the discounted or missed charges (procedure performed, correct fee, actual fee charged, amount missed or discounted). Once the amounts discounted or lost are calculated for this sample, they can be extrapolated to the total practice revenue for an estimate of the total lost in a month or a year.

After calculating the amounts lost, the types of cases where money is lost should be reviewed. Some of the dollars lost may be due to discounts the practice has chosen to allow; for example, senior citizen discounts. A decision needs to be made as to whether the amounts lost through the discounts are worth the benefits of the discount program. Most practices find a certain number of discounts in this audit that aren’t part of any particular program.

Look for patterns in these discounts as well as in the missed charges. Is the same doctor involved in all of the transactions? The same receptionist? Do these things happen on the same day of the week? Same time of day? Same type of appointment? Patterns will help identify the root of the problem. For example, is one doctor primarily responsible for most of the discounts? Do all the missed charges happen on Tuesdays when the practice is short-staffed? Or primarily with hospitalized patients?

Once the root cause has been identified, steps can be taken to correct the problem. Doctors may need to be reminded of their responsibility to follow the practice’s fee schedule and their invoices monitored more closely in the future. One person may need to be designated to put in the charges for hospitalized patients each afternoon between 3-4pm. A new travel sheet procedure may need to be instigated. The corrective action depends on the problem identified.

Some hospitals have chosen to audit all records on a daily basis. The cost of assigning the task to a staff person is often less than the amount of discounted or missed charges and therefore well worth doing financially. At a minimum, the medical record audit should be done periodically to insure new problems are not creeping into the practice.

Dr. Karen E. Felsted, CPA, MS, CVPM is the CEO of the National Commission on Veterinary Economic Issues and can be reached at kfelsted@ncvei.org.

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