How long should medical practices hold operating cash reserves?

Healthcare practices live with structural payer lag. From the day a clean claim is submitted, Medicare typically pays in roughly 14 to 30 days, commercial payers in 30 to 45 days, and denials extend that tail another 30 to 90 days. Days in accounts receivable for a healthy practice runs in the 30 to 40 day range, which means at any given moment one to two months of revenue sits as receivables rather than cash. That structural gap is why a practice can be profitable on its P&L and still run out of money. The right reserve target depends on five practice characteristics. First, payer mix concentration. A practice where one commercial payer is 30 percent of revenue has more downside risk from a single contract dispute or payment delay than a practice with a balanced mix; concentration raises the reserve target. Second, denial rate volatility. Practices with first-pass resolution rates below 90 percent see more rework and longer effective payment cycles, which raises reserve needs. Third, fixed cost ratio. Practices with high fixed costs (multiple physicians on guaranteed salary, expensive leases, recent capex) need larger reserves than practices with variable cost structures. Fourth, debt service. Practices with significant term debt or equipment financing need to be able to service that debt through a downturn; reserve should cover at least 90 days of debt service in addition to operating expense. Fifth, seasonal variation. Specialties with meaningful seasonality (allergy, derm cosmetic, pediatrics) need to be able to absorb the slow quarter without distress. The pragmatic target for most multi-location outpatient practices is 60 to 90 days of total operating expense in unrestricted cash, with an additional working capital line of credit equal to roughly 30 to 60 days of expense as a secondary buffer. Single-location practices and those with payer concentration should push toward the upper end of that range. The reserve should be held in operating bank accounts and high-yield treasury sweeps, not invested in long-duration securities that introduce price risk just when cash is needed. Distributions to owners should be calibrated so that the reserve floor is maintained, not refilled in arrears. Practices that run on 15 to 30 day reserves can survive in steady state but spend management bandwidth firefighting cash; practices with 60 to 90 day reserves spend that bandwidth growing.