Transitioning from Cash to Accrual Accounting in Healthcare: Estimating Bad Debt and Booking Accrued Revenue the Right Way
Why “cash posted” is not the same as “revenue earned”
One of the most misunderstood areas in healthcare finance is the difference between what gets paid and what should be earned. Many practices rely entirely on posted payments from their practice management (PM) system to understand revenue, margins, and growth. Unfortunately, that approach hides risk, distorts performance, and makes forecasting nearly impossible.
The core problem: PM systems are transactional, not financial
Most PM systems are designed to:
Submit claims
Post payments
Close accounts receivable
They are not designed to:
Normalize revenue to contractual allowables
Detect short pays or rate compression
Estimate collectible vs. uncollectible balances
Produce forward-looking cash forecasts
As a result, practices often confuse collections with revenue.
Booking accrued revenue the right way
In healthcare, revenue should be recognized based on the expected allowable, not the cash received. This means:
Revenue is booked at the contracted allowable amount for each CPT and payer
Payments are applied against that allowable
Any remaining balance becomes net accounts receivable, not “missing revenue”
This approach allows leadership to answer critical questions:
Are payers paying less than contract?
Are denials increasing?
Is AR growing because of volume—or because of collection issues?
Why estimating bad debt matters
Not all AR is collectible. Ignoring this reality leads to inflated balance sheets and misleading growth projections.
A practical bad debt framework includes:
Historical collection curves by payer and CPT
Aging-based collectability (e.g., 0–30, 31–60, 61–90 days)
Identification of structural denials vs. timing delays
Rather than waiting for write-offs months later, sophisticated practices estimate bad debt up front, adjusting net revenue booked in the current month accordingly.
The danger of relying on posted EOBs alone
When revenue is based only on posted EOBs:
Short pays can go unnoticed
Claims with no EOB yet show no open balance or an inflated (billable balance) using a predetermined billable amount that is usually 200% to 300% higher than the amount collected
Rate decreases are detected months late
Patient overpayments temporarily inflate revenue
This creates false confidence in performance and makes marketing ROI, staffing models, and growth plans unreliable.
The solution: separate operations from financial truth
High-performing practices treat the PM system as a source of transactions, not the source of truth.
They:
Reconstruct revenue externally using allowables
Apply consistent bad debt assumptions based on historical uncollectible patterns
Track AR and DSO using cohort-based methods
Forecast cash using historical collection patterns
This allows leadership to move from reactive problem-solving to proactive decision-making.
Why this matters for growth
You cannot confidently invest in:
Marketing
New providers
Additional locations
Telehealth expansion
Unless you understand:
What each patient is actually worth
How long cash takes to arrive
How much revenue will never be collected
Without this clarity, growth feels risky—even when the economics are strong.
If your practice relies solely on posted payments to understand revenue, there is a high chance you are underestimating risk—or missing opportunity.
If you want help:
Estimating true net revenue
Building reliable cash forecasts
Identifying payer or denial issues early
Translating operational data into financial clarity
Let’s talk. A clean financial model doesn’t just explain the past—it gives you confidence to grow.
