Cleaning the Aging Before a Loan Application
A solo cardiology practice is preparing a bank loan application. Over the trailing twelve months: gross charges $5,900,000, contractual adjustments $1,850,000, payments $3,100,000, and gross accounts receivable $1,240,000. The aging shows $322,400 - 26% of the total - sitting beyond 120 days. The newly hired administrator proposes writing off the entire over-120 bucket as bad debt before the application, arguing that it will drop days in A/R from roughly 77 to about 57 and present a cleaner balance sheet. The practice has no written financial hardship policy. Roughly $96,000 of the over-120 balance is Medicare and Medicare Advantage coinsurance, and another $61,000 is on claims with appeals still open or timely-filing windows not yet closed. The rest is patient balances, a portion of which have had no statement activity in over a year.
1. Evaluate the administrator's proposal using the numbers. What does the write-off actually accomplish and what does it conceal?
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Run the arithmetic first. Days in A/R is $1,240,000 divided by average daily charges of $16,164 ($5,900,000 / 365), or about 76.7 days. Writing off $322,400 leaves $917,600, or about 56.8 days. On paper, a 20-day improvement.
But cash does not move by a dollar. Net collection rate - payments of $3,100,000 divided by net expected collections of $4,050,000 ($5,900,000 less $1,850,000 in contractuals) - stays at 76.5%, which is the number a sophisticated lender actually looks at. The write-off improves one cosmetic ratio while the underlying performance metric is unchanged and poor. A lender who sees a sudden 20-day drop and a 76.5% net collection rate will ask what was written off, and the answer will not help the application.
What it conceals is the diagnostic signal. A 26% over-120 bucket on a cardiology practice is not a patient-payment problem; it is almost always a denial and follow-up problem upstream. Wiping the bucket erases the evidence of what is broken, removes the worklist that would fix it, and permanently forfeits the portion that is collectible. Presenting a cleaned aging to a lender while knowing the underlying rate is unchanged is also a disclosure risk the practice does not need.
2. Which portions of the $322,400 cannot simply be written off, and why?
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Three buckets are off-limits or require a policy that does not currently exist.
The $96,000 in Medicare and Medicare Advantage coinsurance cannot be routinely waived. Waiving beneficiary cost-sharing absent documented financial hardship, applied consistently under a written policy, exposes the practice to civil monetary penalty and anti-kickback scrutiny - a routine waiver can be treated as inducement. Without a hardship policy, every one of those write-offs is unsupported. If the practice wants to forgive some of it, it needs a written policy defining indigence, a documented determination per patient, and consistent application. That is a project, not a journal entry.
The $61,000 with open appeals or live filing windows is recoverable revenue. Writing it off forfeits it permanently and, in the appeal cases, abandons a dispute the payer may well lose.
Much of the remaining patient balance is real bad debt and can be written off - but only after a documented collection sequence: statements, a final notice, and a defined no-activity threshold. "No statement activity in over a year" is a follow-up failure, not proof of uncollectibility. Check the state statute of limitations before deciding the older tranches are dead; a balance outside the limitations period is a different decision than one nobody called.
3. What should the administrator do instead, and what would you present to the lender?
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Stratify the over-120 bucket into four worklists rather than one write-off: denied and appealable, no-response patient balances eligible for a collection agency or a defined write-off threshold, documented hardship candidates, and true small balances below a stated policy floor. Each gets an owner and a date. Work the $61,000 in live appeals first - it has a deadline and the highest recovery probability.
Then attack the cause. A 26% over-120 rate alongside a 76.5% net collection rate points at front-end and denial management: eligibility verification, prior authorization, and a denial worklist that is actually worked. Set a 90-day no-progress rule going forward so balances do not quietly age into this position again.
To the lender, present the honest story: current days in A/R, net collection rate with the trend, aging by bucket, the dollar value of active appeals, and a written remediation plan with dates. A 77-day A/R with a credible plan and a rising net collection rate is lendable. A 57-day A/R produced by a one-time write-off, with the same 76.5% net collection rate underneath, invites a question the practice cannot answer well.