In-house vs Outsource Billing

When researching billing companies, you will come across those that provide the services of “Billing”, “Billing and Collections”, “Revenue Cycle Management” and other fancy descriptions. Although these are not all exactly the same thing, for simplicity I will just use the term “Billing” when referring to what services these companies provide.

Over the last decade it has become more important than ever for your Physical Therapy company to get paid every penny that you deserve. Narrowing margins in our industry mean that a slightly less than optimal performance by the billing department can easily result in visits making a net loss instead of profit.

At the same time, the billing game has become more tricky. Patients have a greater financial responsibility and they often have a hard time paying their bills. Insurance companies play games that could be considered fraudulent. Regulations change from year to year with increasing complexity.

If we are not at the top of our game in this area, these issues could be enough to cause a practice to close its doors.

So it is no wonder that most PT companies are always looking for the best solution to get paid everything they deserve for the lowest cost. The two main options are to do your own billing in your office (In House) or to contract with a billing company (Outsource). 

The quest for the optimal result leads most PT practices over their business life span to occasionally switch back and forth between these two options. In this pursuit of results, there is a common pathway that many PT practices follow. Here is a typical example of such a life cycle:

Start up: most brand new PT practices go with an outsourced billing company. PT owners wear so many hats when you are first starting out, that to add to that the responsibility to get paid effectively is an almost impossible feat.

Within 2 – 4 years, many practices have become disappointed with their outsourced billing company. There are a lot of them out there. The big ones have significant deficits and many of the smaller ones border on incompetence. A common fault of the larger billing companies is that they just don’t chase the claims very aggressively. Some smaller companies struggle with having enough well trained staff to manage their clients’ accounts well. At this point, a practice often has trained up a very competent office manager. The practice owner perceives that he / she can save some money and control the billing process better with the office manager, leading to greater income and lower cost. So they bring billing in-house.

Within the next 3 years of a practice’s life, the decision is often made to outsource billing again. Perhaps the star office manager left. Maybe they are still there but the owner learns that although they were great at front desk management, billing is a lot more complex and requires specialized knowledge. No one seems to have the time to manage all the accounts properly and it becomes difficult to keep great billing staff. Administrative staff become overwhelmed as patient volume increases. Income doesn’t keep up with clinic growth and the survival of the practice is threatened.

If that sounds like you, hopefully at this point you have a much better idea of what you are looking for in a billing company. You know what data you want to see. You are aware of the tasks that are required of a billing company to be successful. You know what questions to ask before you choose one.

If all goes well, they meet your expectations. You get on time reports that make sense and give you a confident view of your organization’s financial status. Maybe your income per visit isn’t what you had hoped for, but that is more of a function of patient A/R growing and insurance contracts paying less. That is also when you would like your billing company to be able to give you guidance on how to optimize your profit margin through productivity and expense analysis. After all, it is in their interest that you thrive and grow.

The final step for a very small percentage of clinics is that they successfully bring billing back in-house again. This usually only happens when companies have grown to be a medium-to-large multi-clinic organization. At this point it makes sense through economies of scale and systems that have been developed, to build your own Billing Department. Even then, it is a very difficult and time consuming task. So it requires a CEO that has the available time and knowledge to oversee a successful billing department and continually catch areas that need improvement.

The benefit in making this final step is that your billing costs may decrease from the 6-7% outsourced fee to as low as 3 – 5% of total revenue when performing billing in-house. This 1 – 4% saving isn’t sufficient for most PT practices to justify the extra work and potential costly errors. However for very well systematized, larger multi-site practices, it can start to add up to being financially worthwhile.

Where are you in this pathway? What is the best solution for where your organization is now?  Here are some helpful hints that could guide you into determining what is best for your practice.

You could consider doing in-house billing if all of these are true for you:

  • You have a dedicated and educated staff member who knows how to do medical billing AND you have a high level of confidence that they will be a long term employee.
  • You know that this staff member has the ability to hire and manage additional billing staff as needed to keep up with your growth.
  • You personally know what reports you need to be looking at each day, week and month to ensure that your Billing Department is not missing anything.
  • You have the time to review these reports and take corrective action if necessary.
  • You have the time and knowledge to do your own analysis of the billing department to ensure there is no funny business (fraud or theft) occurring in that department.
  • You have a sufficient number of trusted employees to allow division of tasks so that you can minimize the chance of internal theft occurring.
  • You are generating over $2 million in gross revenue annually.

If that isn’t you, or if you are currently doing your own billing in-house and are considering whether to outsource your billing, here are a few things that you should be looking for in a billing company:

  • You should pay 6 – 9% of collections.
  • They should provide you with consistent reports that show their performance related to expectations (see below).
  • They should provide you with very clear policies regarding their workflow.
  • They should be very clear in their policies regarding how much work they will put into chasing each claim. Insurers play funny games and seem to do some of this with the intent of having your billing department give up on the claim. You need to know that your billing partner will not give up on the claim until all appeals have been exhausted.
  • There should be close communication on all denials and reversals so that if any changes need to occur in your internal operations for you to be paid correctly, you know as early as possible.
  • They should be able to provide you with guidance on metrics and how to improve your performance based on your billing information.

Here are some sample metrics that you may consider aiming for, whether billing in-house or outsourcing. Every practice is different, but this is a general guide:

  1. ARC ratio should be less than 1.33. Your ARC ratio is your total A/R (not including auto and attorney cases) divided by the average amount billed per month over the last 3 months (not including auto or attorney cases).
  1. The % of your A/R that is over 90 days should be less than 10% of your total A/R.

What should you do now? If the above two calculations are in line and your billing expense is less than 8% (Outsourced) and 5% (In-house), then I wouldn’t recommend changing anything.

If any of those is not the case, then it may be time to consider making a switch.