Accounting for Medical and Dental Practices

Charges are not revenue

In almost every other business, the price you quote is the amount you collect. In a practice, the charge is a starting figure that nearly nobody pays.

You bill $400 for a procedure. The commercial payer's contracted rate is $230, so $170 is a contractual adjustment — written off by agreement, not because anyone failed to collect. Medicare allows $180. Medicaid allows $110. The self-pay patient is billed $400 and may pay $400, $200 on a plan, or nothing.

So a practice producing $2.4M in gross charges might collect $1.4M, and the gap between them is not a collections problem. It is the contracts you signed. Practices that report on charges are reading a number that has no relationship to the money arriving, which is why the P&L and the bank account seem to disagree for months at a time.

Booking it correctly

The accounting treatment follows the economics. Record gross charges as revenue, then record contractual adjustments as a contra-revenue account immediately below, arriving at net patient service revenue. Bad debt and charity care sit separately, because they are different things with different causes.

That structure matters because it keeps the two problems distinguishable. A rising contractual adjustment percentage is a payer mix or contract problem — you are seeing more Medicaid, or a commercial contract renewed at worse rates. A rising bad debt percentage is a front-desk and collections problem — eligibility not verified, copays not collected at the time of service, patient balances not pursued.

Collapse them into one write-off line, as many practice books do, and both problems become invisible at exactly the point where the distinction would tell you what to fix.

• Gross patient service charges
• Less contractual adjustments, by payer where the system supports it
• Less bad debt and charity care, tracked separately from each other
• Equals net patient service revenue
• Plus other revenue — ancillary services, dispensed products, cosmetic or elective work, facility fees

Cash basis is fine for taxes and useless for management

Most small practices keep their books on cash basis because their CPA prepares the return that way, and for tax purposes that is often the right call.

The problem is that a cash-basis P&L in a practice is close to meaningless as a management tool, because the lag between service and payment is 30 to 90 days and varies by payer. March's cash-basis revenue is a blend of January commercial claims, February Medicare, and patient payments from four different months. A strong clinical month can appear weak, and a slow month can appear strong, purely as an artifact of when claims cleared.

The workable answer is not to abandon cash basis for taxes. It is to keep the tax books on cash and produce an accrual view for management — revenue recognized when service is provided, receivables valued at expected collections rather than at charges. Most practice management systems hold the data required; what is usually missing is anyone reconciling that data to the general ledger.

Provider-level profitability

The single most valuable report in a multi-provider practice, and the one most practices do not have. It answers whether each provider generates more than they cost, which drives compensation, recruitment and capacity decisions.

Building it requires three allocations, and the third is where the arguments happen.

• Direct revenue. Net collections attributable to each provider, credited on who performed the service. Handle supervised and incident-to billing with a documented rule and apply it consistently.
• Direct cost. Provider compensation fully loaded, plus dedicated clinical support staff, malpractice insurance, licensing, continuing education.
• Allocated overhead. Rent, front office, billing, administration, equipment. Allocate on a stable documented basis — square footage or room-days for space, encounter volume or collections for shared staff. Pick one, write it down, and do not change it mid-year.

Overhead benchmarks, read honestly

Practice overhead is usually quoted as total operating expense excluding provider compensation, divided by net collections. The ranges vary by specialty and are worth knowing, because a practice five points off the benchmark has a specific problem worth finding.

• Primary care: 55-65% of net collections
• General dentistry: 60-65%, with higher supply and lab cost
• Specialty surgical practices: 40-55%, on higher per-encounter revenue
• Practices owning imaging or ancillary services: higher overhead and higher revenue, so the ratio needs reading alongside the absolute margin

The comparison that goes wrong

Benchmarks mislead when the denominator is inconsistent. A practice measuring overhead against gross charges will look extraordinarily efficient and be comparing itself to nothing. Always use net collections.

The other common distortion is owner compensation. In an owner-operated practice the line between salary and profit distribution is a tax decision as much as an economic one, and practices that classify all owner draw as compensation report an artificially low profit margin while practices that classify it as distribution report an artificially high one.

The fix is to normalize: pay owners a market-rate salary for the clinical work they actually perform, and treat everything above that as a return on ownership. That produces a P&L where the practice profit means something, which is also exactly what a buyer or a partner-track associate will want to see.