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; 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.

The lesson here is to hold firm. It is sometimes easy for a doctor to “roll over.” We are so busy with patients that we are not prepared for fights. I was. You can be, too, if you educate yourself. I informed the company that it could sue me for what it perceived I owed. I told them that if they sued me, I would fight them. I explained that if we settled upon a fair amount excluding any termination fee, then I would release funds only upon receiving full backups of all our data. That is key. You must hold your payment until you get all your patient information and data back. Otherwise, you risk paying them and not getting what is rightfully yours.

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, ). As a physician entrepreneur, Dr. Hacker has started and sold many well-known companies including and PassportMD. He is founder of a medical practice in Boca Raton, FL.