Q. Is there a formula to calculate the net present value for the balance of a patient's account compared with a payoff of, say, $50 per month for many years for a $2,000 balance? What is the best way to deal with large balances (thousands of dollars) for people who pay $10 to $50 dollars each month? It must cost us more than that just to service these accounts.
A. Excel, or similar applications and calculators with a present value (PV) function, can calculate the PV of any stream of future payments, but the result depends on the assumptions you make about your rate of return. In your example, the net present value of 40 monthly payments at $50 each is $1,817.65 if you assume a rate of return of 6 percent. A higher rate of return yields a lower present value and vice versa.
Physicians are allowed to charge their patients interest under certain circumstances as specified by state and federal law, as long as the interest rate is below the ceiling specified in state law and published monthly in the Texas Register. You also can find the ceiling rate in the Texas Credit Letter published by the state Office of Consumer Credit Commissioner.
Note: You should always consult with legal counsel when crafting a policy regarding interest of overdue accounts.
To collect interest, you must have a written agreement with the patient. Physicians may charge a very low interest rate (specified by state law) without a contract. But it would be ethically and otherwise preferable to notify patients in advance of charging any interest amount. TMA's Policies and Procedures: A Guide for Medical Practices has a "financial arrangements" document (customizable for your practice) that the patient signs agreeing to specified interest charges and monthly or other payment arrangements. The guide is available through the TMA Education Center.
TMA Practice Consulting suggests that the fourth quarter of each year is a good time to manage patient accounts with large balances. During this period:
- Advise patients with account balances that they must make a payment by Dec. 31 for it to be considered a tax-deductible medical expense of the current year. Some patients may use a credit card to pay off their balance and take the deduction.
- Consider which balances to write off. There is no rule of thumb for writing off balances; it is per the practice's discretion. Many practices make the determination based on the patient's ability to pay. A more practical solution may be to set a policy for indigent charity write-offs. Many practices look at what the patient makes and what current debts he or she has, and compare the patient's situations with the state poverty guidelines. Or, if a patient has consistently reduced an account by regular payments and the practice has recovered the actual expenses (fixed expenses), the practice should weigh costs of collection versus forgiving the balance.
TMA Practice Consulting has worked with many TMA member practices in assessing their revenue cycle, developing billing guidelines, and other custom services. For more information, call (800) 523-8776 or email firstname.lastname@example.org.
Revised Oct. 8, 2014
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