Managing a medical practice is hardly intuitive, and it is not something that “comes naturally.” Unfortunately, it also is not something typically taught in medical school. For many physicians, then, learning to manage the practice is a handson experience, fraught with potential perils and pitfalls. Combined with the demands of seeing patients, establishing a reputation in the community, and maintaining a life outside of the practice, many physicians find little time to educate themselves about managing a practice.

Having navigated the challenges of practice management with some success—and lessons learned from missteps along the way—I wrote, The Medical Entrepreneur Pearls, Pitfalls and Practical Business Advice for Doctors (Nano 2.0 Business Press http://www.TheMedicalEntrepreneur.com). The following discussion of in-house versus outsourced billing is adapted from the book.

Billing and Getting Paid

Billing—the process of submitting a claim for a patient encounter—requires entering a code for the procedure performed by a provider (CPT or Current Procedural Terminology code) during a patient encounter and matching that code to a diagnosis code (ICD or International Classification of Diseases code). These codes are then grouped together along with a fee, and a claim is generated. Computer software currently does most, if not all, of this for you. There are several good programs (practice management software), and they are frequently bundled into or alongside electronic health record (EHR) software.

After you generate a bill for a patient encounter, the bill is submitted electronically via an electronic CMS (Centers for Medicare and Medicaid services) 1500 form (formerly HCFA or Health Care Financing and Administration form). That bill is sent directly to the patient's insurance company. This is the first part of the billing process.

The second part of the billing process is referred to as posting payment. Most insurers will post automatically and electronically to the patient's financial record. Posting is performed within the practice management software program. This is a huge savings for your practice. However, posting manually is required for noninsurance payments and for some secondary insurers. Secondary insurance is insurance that covers the remainder of a patient's bill after the primary insurer has met its financial obligations.

The last part of the billing process is the collection of fees and managing accounts receivable. This is the most time-consuming part of billing. It requires diligence to make sure your receivables don't get out of control. You will need to regularly monitor your 30/60/90/120 day receivables. You will need to have a staff person responsible for billing patients for the balances due after their insurance payments (called “balance billing”). Additionally, you will need to send bills, collect payments, and post these payments manually. It is important to understand that most insurance companies' payments will post automatically to your billing software. Balance billing to secondary insurances and patients will likely require personnel and time.

There are pros and cons to billing internally versus outsourcing your billing to a billing company. I have done it both ways and was most happy when I billed internally. I found that the billing company required much of my staff's time just to check to make sure they didn't make mistakes. It made many mistakes that would not have been detected had we not checked on them. As a result of that experience, I now prefer to do my own billing rather than outsource it.

Lessons from Experience

After I discovered that our billing company was making many billing mistakes, I decided to terminate the contract. This is not easy. Make sure you read the termination provisions in your contract carefully. The billing company had made many financial errors that cost us thousands of dollars. The company provided poor customer service. It had made many mistakes and billing errors that were not caused by us. I knew I had to change. I decided to do the billing internally and use a hosted ASP solution for billing. My costs would drop significantly.

The problem was how I could terminate the contract with the billing company. The company required a minimum 60-day notice. This meant that I would have to pay it for at least 60 more days. I could not stomach paying the company another penny since it had cost me so much in billing mistakes. My other concern was how I would get all my patient financial records, data, and balances transferred over and back to us. The accounts receivable would be a nightmare to transfer over. I did not let the company know I was terminating it until I was absolutely ready and had all the information I needed.

At the right time, I decided I would not send the billing company any new patient bills. I would temporarily not pay any bill that I owed to it. That was the only leverage I had. Two months elapsed and my account was overdue. I owed a significant amount. I gave immediate notice for termination and indicated that it had breached its obligations. Of course, the billing company did not accept this. They informed me that since I terminated its services, I had to pay it a termination fee equal to 60 days of billing. This was over $20,000. I was prepared for this. I disagreed, politely, and reminded the company that I had scratched this clause out of the contract before I signed it. And, furthermore, it breached its obligations, so I was terminating it for cause. The billing company was not due any termination fee because they had not performed satisfactorily under the contract.

gave immediate notice for termination and indicated that it had breached its obligations. Of course, the billing company did not accept this. They informed me that since I terminated its services, I had to pay it a termination fee equal to 60 days of billing. This was over $20,000. I was prepared for this. I disagreed, politely, and reminded the company that I had scratched this clause out of the contract before I signed it. And, furthermore, it breached its obligations, so I was terminating it for cause. The billing company was not due any termination fee because they had not performed satisfactorily under the contract.

The company had a choice: sue me for a termination fee and fight me with a risk of other doctors learning about our problems, or accept a settlement fee. It called me back asking for a settlement. They agreed to waive its claim for any termination or penalties in exchange for payment of the balance due. I received everything I needed, and I paid the company the past due amount. You can see that this process is not easy. It is stressful. The outcome may not always go your way. You must understand what you are getting into when you sign up with a billing service or any third party vendor that may be helping you manage your practice.

Preparation is Essential

I want to be clear that not all billing companies operate this way. Many do a fine job but there are risks whenever you hire them. The pros and cons presented here nicely outline the considerations you must weigh when approaching practice management in your office. You must understand, negotiate and be prepared for all the risks of a vendor relationship before you sign any contract. Always sign a contract assuming it will be terminated at some point and protect yourself for that termination process. Those few moments of preparation will save you hours of headaches later.

Steven M. Hacker, MD is author of The Medical Entrepreneur Pearls, Pitfalls and Practical Business Advice for Doctors (Nano 2.0 Business Press 2010, TheMedicalEntrepreneur.com ). As a physician entrepreneur, Dr. Hacker has started and sold many well-known companies including Skinstore.com and PassportMD. He is founder of a medical practice in Boca Raton, FL.

Take-Home Tips.

There are pros and cons to billing internally versus outsourcing your billing to a billing company. IF you work with a company, you must understand, negotiate and be prepared for all the risks of a vendor relationship before signing any contract. Always sign a contract assuming it will be terminated at some point and protect yourself for that termination process. Those few moments of preparation will save you hours of headaches later.

Pearl:

Negotiate with billing companies. They will quote that the average fee is six percent on collections. I have found that most billing companies will negotiate and will accept less.

Pitfalls to Avoid:

Before you contract with a billing company, review its termination policy carefully. Make sure you can terminate without cause and without any penalty at any time. Make sure all the records and billing records are yours and will be returned to you.

Table 1. Pros and Cons of Billing Internally

Pros:

  1. In the beginning you will be slow enough to watch the billing and to hire the one staff member that can bill.
  2. If you do it yourself initially, you will learn all about billing issues. If you ever switch to a billing company, you will be able to monitor its production.
  3. Self-billing is simpler these days. Almost everything is computerized. Most of the posting of insurance payments is done automatically.
  4. There are excellent billing software programs that are inexpensive. I prefer a hosted ASP (Application Service Provider) solution. You don't have to load or maintain software locally on your own computers (servers). ASP systems are Web based and very secure. I highly recommend ASP models.
  5. You have complete control over your billing and your accounts receivable (AR), and your staff talks directly to your patients about their balances due. Billing companies may be rude to your patients, hassle patients, or not answer customer service questions promptly. Hence, your staff dealing with your patients is a good choice.

Cons:

  1. You have to hire trained personnel to perform this function.
  2. The AR and collection portion can be overwhelming and may require hiring additional personnel to support the growth of your practice.
  3. May limit your ability to grow and add more doctors since you will need to add more employees.
  4. You have to purchase a practice management billing software program and maintain and support it.

Table 2. Pros and Cons of Outsourcing (Billing Company)

Pros:

  1. The work is outsourced, so you can focus on your patients and grow your core business.
  2. You do not have to hire personnel to perform this function.
  3. You do not have to buy or maintain billing software.
  4. In the beginning of your practice, you may not have the expertise or resources to perform billing internally.

Cons:

  1. Billing companies may provide bad customer service and thus reflect poorly on you and your practice.
  2. Billing companies may make many mistakes, so you have to be prepared for this by hiring someone to check on them.
  3. Companies may be difficult to deal with because they are offsite.
  4. If the billing company does something wrong, such as overbill a patient, you are still liable.
  5. Companies are only as good as the lower-level employees they hire. They probably pay less than you would internally.
  6. Companies are difficult to break away from once you start .
  7. They are often very expensive, despite what they show /tell you.