Medical practice accounting is dominated by revenue cycle complexity: contractual adjustments, insurance aging, denial management, patient responsibility. Plus HIPAA compliance layered across everything. This guide covers what medical practice accounting requires beyond generic bookkeeping.
Most businesses bill an amount and collect that amount (minus collections effort). Medical practices are different: services billed at full rates but collected at rates determined by payer contracts. The gap between billed and collected drives almost all medical practice accounting complexity.
A practice that produces $2M in gross charges might collect $1.1M in net payments. The $900k gap breaks down as:
Categorizing this gap correctly matters: contractual adjustments are not bad debt; denials are different from patient bad debt; miscategorizing creates false signals about revenue cycle health.
Net collection rate = collections / (charges − contractual adjustments). Target 92–97% for well-run practices. Below 90% indicates revenue cycle problems. Above 98% usually impossible without aggressive practices.
AR in days = AR balance / (annual charges / 365). Target under 40 days. Over 60 days indicates collection or billing process problems. Over 90 days suggests systemic revenue cycle dysfunction.
Medical AR tracks differently from other industries because of payer mix complexity:
Different payers have different expected payment timelines:
AR aging buckets track each payer category separately. Insurance claims over 90 days old are usually denials that haven't been worked. Patient balances over 90 days typically need collection agency intervention.
Denied claims need systematic rework: identify denial reason, correct issue (coding, eligibility, authorization), resubmit. Practices with strong denial management recover 60–75% of denials; practices without systematic denial management write off 40–60% of initial denials as revenue lost.
This work typically sits with revenue cycle staff (not accounting bookkeepers), but accounting needs to track denial volume, recovery rate, and aging of denied claims for management reporting.
Medical practices are HIPAA covered entities. Anyone accessing patient-level data (including AR reports with patient names and balances) is subject to HIPAA rules.
Any third-party accountant, bookkeeper, or accounting service handling data that identifies patients must sign a BAA. The BAA is not optional – it's required by HIPAA Privacy Rule for all Business Associate relationships. See our HIPAA BAA template.
Generic financial statements without patient-level detail aren't PHI. Practice-level aggregate financial data isn't PHI. But the AR aging report that shows "John Smith – $1,240 balance, insurance pending" is PHI.
Accountants handling medical practice engagements need:
Offshore accountants working on medical practices sign BAAs just like US-based accountants do. HIPAA Privacy and Security Rules apply regardless of accountant location – they apply to the data and the relationship, not the geography.
Related: healthcare industry page, dental practices, HIPAA BAA template.
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