Most independent practices and mid-sized groups do not lose money because they lack patients or good clinicians. They lose money quietly in the back office, inside unmanaged accounts payable (AP) and accounts receivable (AR).
Invoices to vendors get paid late or out of order. Claims sit untouched past 60 or 90 days. Patient balances drift into bad debt. The practice absorbs write-offs, staff scramble to “put out fires”, and leadership gets a distorted view of actual performance.
This is not just an accounting problem. It affects whether you can:
- Make payroll on time
- Hire the providers you need
- Invest in new service lines or technology
- Negotiate credibly with payers and vendors
This article breaks down how AP and AR operate in a medical office, why they are tightly linked to cash flow and growth, and what practical steps healthcare leaders can take to turn them into a strength rather than a vulnerability.
Understanding AP and AR in a Medical Practice: More Than “Bills and Collections”
In healthcare, AP and AR are not generic finance concepts. They behave differently than in most other industries because of payer rules, clinical workflows, and regulatory requirements.
What “AP” actually means in a medical setting
Accounts payable is every short term obligation you owe to keep the practice running. Typical categories include:
- Rent or mortgage, utilities, telecom, cleaning services, IT support
- Clinical supplies, vaccines, implants, lab services, equipment leases
- Outsourced services such as revenue cycle vendors, transcription, call center
- Subscription systems like your EHR, clearinghouse, dictation, analytics tools
AP has two main operational risks:
- Disruption risk if critical vendors are not paid on time
- Cost risk if you miss early payment discounts or incur late fees
What “AR” really represents in healthcare
Accounts receivable is not just “money owed”. It reflects every breakdown in your revenue cycle.
- Front desk misses eligibility requirements, which later converts to patient bad debt
- Coding misses specificity, which converts to denials or downcoding
- Claims are not followed up at 30, 60, 90 days, so recoverable dollars age out
Key AR categories in a medical office:
- Insurance AR (by payer, product, and aging bucket)
- Patient AR (copays, deductibles, non-covered services)
- Pending and suspended claims (in clearinghouse or EHR work queues)
Why this distinction matters: AP measures how well you manage your obligations. AR measures how well you convert clinical work into cash. If you only look at top-line charges or bank balances, you miss the operational truth. Mature RCM leaders track AP and AR together to understand whether the practice is actually healthy or just temporarily “getting by”.
How AP and AR Interact To Drive (or Starve) Cash Flow
AP and AR are often managed by different staff or even different departments. That separation hides how tightly they are connected.
Cash conversion timing
In a typical practice:
- Vendors expect payment in 15 to 30 days
- Staff and physician payroll is every 2 weeks or monthly
- Commercial payers remit in 14 to 35 days if there are no edits or denials
- Patient balances may take 30 to 120 days, or longer if outsourced
When AR stretches beyond 45 or 60 days, but AP is still due in 15 to 30 days, your practice funds the gap with cash reserves, lines of credit, or delayed investments. Over time, this pattern constrains growth and increases financial risk.
Example: a 10 provider group practice
Assume:
- Average monthly charges: 1.2 million dollars
- Baseline net collection rate target: at least 96 percent
- Payor mix: mostly commercial, some Medicare and Medicaid
Scenario A: Strong AR control
- Average AR days: 30 to 35
- Insurance denials resolved quickly, patient balances engaged early
- Result: predictable cash flow, AP paid on time, ability to negotiate favorable terms
Scenario B: Weak AR follow up
- Average AR days: 55 to 70
- Large balance in 90 plus day bucket, net collections closer to 91 to 92 percent
- Result: 40,000 to 60,000 dollars per month unrealized, AP schedules compressed, capital spending delayed
In Scenario B, leadership may feel constant “cash tightness” even though volume and compensation look strong on paper. The real problem sits in AR, and it shows up as stress in AP.
Key metrics to monitor the AP / AR relationship
- AR days outstanding by payer and by location
- Percent of AR over 90 days (should ideally be under 15 percent in most specialties)
- Net collection rate (target 96 percent or higher) versus “expected” allowed amounts
- AP aging (over 30 or 45 days) by critical vendor category
- Monthly cash-in versus cash-out trend for at least 12 consecutive months
Once these metrics are visible to leadership in a single view, you can begin to intentionally align AP policies with realistic AR cash timing instead of reacting month by month.
The Operational Risks of Weak AP and AR Management
Financial reports often hide the real operational cost of poor AP and AR. Leaders see margin compression but not the specific process failures causing it. Below are common risks and how they show up in daily operations.
Hidden risks in AP
- Vendor leverage: Late payments reduce your negotiating power. You lose early pay discounts and may accept higher renewal rates because you “cannot afford” to disrupt services.
- Clinical disruption: Delayed payment to labs, imaging groups, or supply companies can lead to shipment holds. Patients experience rescheduling or limited inventory, which damages satisfaction and referral patterns.
- Compliance risk: Unclear AP processes for items like lease payments or licensing fees can create exposure in audits or accreditation reviews.
Hidden risks in AR
- Denials becoming write-offs: When AR follow up is under-resourced, denials that could have been overturned in 30 days become permanent revenue loss at 90 plus days.
- Patient dissatisfaction: Inaccurate estimates, surprise balances, and confusing statements drive complaints, avoidable disputes, and bad reviews.
- Coding and documentation pressure: When AR cash is tight, some organizations unintentionally pressure coders or providers to “code higher,” which increases compliance risk and payer scrutiny.
Staff burnout and turnover
Weak AP and AR processes create a constant emergency posture in the back office. Staff jump between:
- Putting out fires with vendors who are threatening to stop services
- Handling angry patient calls about balances that were not explained clearly
- Responding to urgent leadership requests for “why this month looks bad”
This reactive environment drives burnout and turnover, which then worsens AP and AR performance further. Breaking this cycle requires intentional design, not just hiring “more people” into broken workflows.
Designing a Practical AR Management Framework for Medical Practices
A mature AR process looks the same across many high-performing practices, regardless of specialty. It is structured, measurable, and proactive. Below is a framework that can be adapted to independent practices, groups, or hospital owned clinics.
1. Build payer level visibility
Do not look only at total AR. Segment by payer and plan type. At minimum, track monthly:
- AR days by payer
- Percent of AR over 60 and over 90 days by payer
- Top denial reasons by payer and root cause
This will reveal patterns, such as a commercial payer whose edits require extra documentation or a Medicare Advantage plan with systematic underpayments.
2. Enforce disciplined follow up intervals
Set specific follow up rules, for example:
- All unpaid claims touched at 25 to 30 days from submission
- Secondary follow up at 45 to 55 days if still unresolved
- Escalation process for claims over 75 days including supervisor review and possible appeal
Embed these rules into your practice management system work queues. Do not rely only on staff memory or ad hoc spreadsheets.
3. Control patient balances early
AR does not begin at the statement. It starts at scheduling and check in. Key steps:
- Eligibility and benefits verification (including deductible status) before or at point of service
- Clear communication of estimated patient responsibility with scripted staff language
- Offer of payment plans, online payment options, or card on file where appropriate
If patient balances are not positioned correctly up front, your back office bears a higher cost to collect smaller amounts later.
4. Track and manage AR performance as rigorously as clinical metrics
At a minimum, leadership should see a revenue cycle dashboard monthly that includes:
- AR days by payer and location
- Net collection rate
- Denial rate and appeal success rate
- Patient collection rate on self-pay and residual balances
RCM leaders can then prioritize payer negotiations, contract updates, education for providers, and staffing changes based on data rather than anecdote.
Modernizing AP in Medical Offices To Support Strategic Growth
AP is often treated as a bookkeeping task. In a capital constrained healthcare environment, it needs to be treated as a strategic function that protects cash and supports growth.
1. Categorize vendors by criticality
Build a vendor matrix with at least three categories:
- Tier 1: mission critical (EHR, clearinghouse, malpractice insurance, utilities, key clinical suppliers)
- Tier 2: important but replaceable (office supplies, some subscription tools)
- Tier 3: discretionary (marketing agencies, optional add on tools, low impact memberships)
Align payment timing accordingly. Tier 1 vendors should rarely if ever experience late payment. Tier 3 vendors can be paused or renegotiated quickly if AR tightens.
2. Synchronize AP schedules with realistic AR timing
Once you know your typical AR days, you can:
- Negotiate terms with key vendors that align with when you actually receive cash
- Stagger large recurring payments (for example EHR, rent, malpractice) across the month
- Reserve cash for expected payer delays in months with major coding changes or contract renewals
This moves your practice away from last minute wire transfers and toward a stable cash calendar.
3. Implement AP automation with appropriate controls
Manual AP creates risk of duplicate payments, missed invoices, and poor visibility. Consider:
- Centralized electronic invoice capture and approval workflows
- Standardized GL coding and vendor naming to support analytics
- Approval thresholds (for example manager approval up to a certain amount, executive signoff above that)
Automation should never remove control. It should instead enforce consistent payment discipline that aligns with your cash plan and compliance requirements.
Staffing, Governance, and Accountability for AP and AR Success
Even the best workflows fail if there is no clear ownership. Many practices assume their billing manager or office manager “has it”. That assumption often hides fragmented responsibilities and finger pointing when cash becomes tight.
Clarify roles and reporting lines
Consider a simple governance structure:
- Revenue Cycle Lead owns AR performance, denial management, and patient collections, and reports key metrics monthly.
- Finance / Operations Lead owns AP, vendor contracts, budget adherence, and cash forecasting.
- Executive Sponsor (physician leader or practice administrator) reviews AR and AP reports together and resolves policy conflicts.
Establish a standing “cash performance” review
On a monthly basis, leadership should review:
- AR performance (by payer, aging, and denials)
- AP aging, especially for Tier 1 vendors
- Upcoming known events (payer policy changes, vendor renewals, staffing changes)
Use this session to decide concrete actions, for example:
- Add temporary AR follow up staff for a high denial payer
- Renegotiate an unfavorable supply contract
- Shift capital purchases out one quarter to preserve working capital
Link incentives to measurable outcomes
Where appropriate, tie part of manager or team incentives to:
- Reducing AR days to a target band
- Reducing denials for top 5 reasons
- Maintaining AP for Tier 1 vendors with no late payments
Be careful not to incentivize behavior that increases compliance risk, such as aggressive coding or inappropriate patient balance forgiveness. Focus on process reliability and accuracy instead.
When To Consider Outside Help for AP and AR Optimization
Some practices can stabilize AP and AR internally once they bring visibility and structure. Others reach a limit based on staffing constraints, growth, or complexity of payer contracts.
Signals you may need external support
- AR days have been above 45 to 50 for more than two consecutive quarters
- Denial rates are high and trending upward, especially on medical necessity or authorization
- Your internal team spends most of its time on basic claim status checks rather than targeted denial resolution
- AP is increasingly reactive, with vendors escalating for payment and frequent short term cash “crunches”
In such cases, partnering with experienced revenue cycle professionals can accelerate improvement. If your organization is looking to improve billing accuracy, reduce denials, and strengthen overall revenue cycle performance, working with experienced RCM professionals can make a measurable difference. One of our trusted partners, Quest National Services, specializes in full service medical billing and revenue cycle support for healthcare organizations navigating complex payer environments.
Whether you insource or outsource, leadership retains responsibility for setting expectations, reviewing performance, and ensuring that AP and AR support your overall strategy rather than dictate it.
Turning AP and AR Into Strategic Levers, Not Chronic Pain Points
Accounts payable and receivable sit at the center of every medical office’s financial reality. They determine whether you can:
- Cover payroll and vendor obligations without last minute borrowing
- Invest in clinicians, equipment, and new services at the right time
- Withstand payer behavior shifts, coding changes, and economic pressure
When AP and AR are unmanaged, the practice lives month to month. When they are designed, measured, and governed, they become strategic levers for sustainable growth.
For independent practices, group practices, and hospital owned clinics alike, the path forward is clear:
- Make AP and AR performance visible with payer level and vendor level data
- Standardize AR workflows and follow up rules, and engage patients early and clearly
- Align AP timing with realistic cash conversion of claims and patient balances
- Assign clear ownership, review performance monthly, and adjust based on data
If you want help reviewing your current AP and AR structure, or you are planning broader revenue cycle changes, you can contact us to discuss your goals and constraints. A focused assessment and a few well chosen changes are often enough to move your practice from chronic cash anxiety to predictable, data driven control.
References
American Academy of Family Physicians. (n.d.). Financial management in the medical practice. Retrieved from https://www.aafp.org
Healthcare Financial Management Association. (n.d.). Revenue cycle management. Retrieved from https://www.hfma.org
