How Chiropractors Should Record Personal Injury Lien Settlements

On cash-basis books, record personal injury income when the money arrives, at the amount actually received, in its own revenue account, and match every check to the case it pays. The full bill and the open lien stay in your practice software until the case settles. The reduction the attorney negotiates isn't an expense. It's the part of the bill you never collect, and it should be visible in your reports, not buried.

Why PI money is different

Personal injury patients are treated now and paid later. Instead of collecting at the visit or billing health insurance, the practice usually signs a lien or letter of protection with the patient's attorney. The bill is paid out of the settlement, which can take many months or longer, and the attorney often asks the practice to accept less than the full balance so the case can close.

Along the way, money can come in from more than one place:

• MedPay or PIP. The patient's auto policy may pay part of the bill during treatment. MedPay is optional coverage on many auto policies, and PIP applies in states that require it. Coverage limits and rules vary by state and by policy.
• The settlement check. When the case closes, the attorney pays the practice, usually from the firm's trust account. One check can cover one patient or several, such as two family members hurt in the same accident.
• The patient. Some patients pay part of the balance themselves. Whether you can bill a patient for the difference after a reduction depends on your lien agreement and your state's rules, so that's a question for your own attorney.

If all of this lands in one income account with insurance and cash visits, you can't see what PI cases actually bring in, how long they take, or how much is still waiting on a settlement. That's the first thing to fix.

A worked example

Say a patient is hurt in a car accident and treats for four months. The practice bills $6,000 in charges. The patient's MedPay coverage pays $1,000 during treatment, leaving a $5,000 lien. A year later the case settles, the attorney asks the practice to reduce its bill by $2,000, and the practice agrees. The attorney sends a $3,000 check.

On cash-basis books, the P&L shows $4,000 of PI income for this case: $1,000 in the month MedPay paid and $3,000 in the month the settlement arrived. The $6,000 of charges never hit the P&L, so the $2,000 reduction doesn't either. Booking the reduction as an expense would double count it, because the income it reduces was never recorded. Collected over billed is $4,000 out of $6,000, about two-thirds, and that ratio across all your closed cases is worth watching.

Cash or accrual changes the answer

Most small practices keep their books on a cash basis, and PI income fits cash basis well, since the final amount isn't known until the check arrives. On accrual books, charges are recorded as income when the care is given and the unpaid balance sits in accounts receivable. With PI cases that receivable can be large and uncertain, so an accrual practice usually needs a way to estimate what won't be collected, and reductions get written off against it.

Which method your practice uses, and how PI receivables are treated on your tax return, is your CPA's call. Our guide to cash vs accrual accounting explains the difference. The rest of this post assumes cash basis, which is where most chiropractic practices start.

How to record it, step by step

1. Set up separate income accounts. At minimum: PI settlements and PI MedPay/PIP, apart from insurance, cash visits, care plans and product sales.
2. Record MedPay and PIP payments as they arrive. Match each one to the patient's account in your practice software, the same way you'd match an insurance EOB.
3. When a settlement check arrives, find the case. The attorney usually sends a letter or disbursement statement with the check. Use it to post the payment to the right patient, or patients, in your practice software.
4. Record the full check to PI settlement income. If one check covers two patients, the books can show one deposit while the practice software splits it by patient.
5. Adjust off the reduction in your practice software. That clears the case so it stops showing as an open lien. Keep the attorney's reduction request with the case file.
6. Note the reduction on your monthly PI report. Billed, collected and reduced for each closed case, so you can see what reductions cost you over time.

If the patient pays part of the balance themselves, by card at the front desk or after the case closes, record it to PI income too, not cash visits. Otherwise the case looks like it collected less than it did, and your collected-to-billed ratio for PI work comes out wrong.

Mistakes we see most often

• Lumping settlement checks in with insurance. You lose any view of what PI work actually earns and how long it takes to get paid.
• Booking the reduction as an expense. On cash-basis books this understates profit, because the billed amount was never income.
• Recording the deposit with no case attached. Months later, nobody can tell which lien it closed, and the open lien report in your practice software stays wrong.
• Treating open liens like cash in the bank. A $150,000 open lien total isn't $150,000 coming in. Plan around what your closed cases actually collected, not what was billed.
• Forgetting the cases that pay nothing. When a case is dropped or lost, the balance needs to be cleared or billed according to your agreement, or it sits in your open liens forever.

The monthly routine and what to hand your CPA

Each month, match every MedPay, PIP and settlement deposit to a case, then reconcile the bank. Pull your practice software's open lien or PI aging report and keep the total with the month's financials. It doesn't go on a cash-basis balance sheet, but it's the best measure of what's still out there.

At year end, your CPA will usually want:

• PI income by month, split between settlements and MedPay or PIP
• A list of cases closed during the year, with billed, collected and reduced amounts
• The open lien total at year end, with aging if your software provides it
• Copies of any year-end tax forms you received from attorneys or insurers, so they can be tied to the books

How we handle it

Our bookkeeping for chiropractors keeps PI income on its own lines, apart from insurance, cash visits, care plans and product sales. We match each settlement check and MedPay or PIP payment to the collections report from your practice software, such as ChiroTouch or ChiroFusion, and add your open lien total to the monthly reports so you know what's still waiting on a settlement. We never need treatment notes or clinical records, only financial reports and your bank feeds, in QuickBooks Online.

It's part of our wider healthcare practice bookkeeping. Plans start at $299 a month; any setup or catch-up fee is quoted up front. If you also sell prepaid care plans, we track those as visits owed until patients use them. See our chiropractic bookkeeping page for how the monthly work runs.

Common questions

When should a chiropractor record personal injury income?

On cash-basis books, when the money arrives: MedPay or PIP payments during treatment and the attorney's settlement check when the case closes. The billed charges and open lien stay in your practice software until then. If your books are on accrual, your CPA decides how PI receivables are handled.

Is a lien reduction a business expense?

Not on cash-basis books. The billed amount was never recorded as income, so the reduction is simply money you didn't collect. Adjust it off in your practice software and show it on your PI report so you can see what reductions cost you.

How do I record one settlement check that covers two patients?

Record the full check as one deposit to PI settlement income in the books. Use the attorney's disbursement statement to split the payment between the two patients in your practice software, so each case closes correctly.

Should open liens show on my balance sheet?

Not on cash-basis books. Keep the open lien total from your practice software with your monthly financials instead. On accrual books they would sit in accounts receivable, and your CPA decides how to estimate what won't be collected. Our bookkeeping for chiropractors page covers how we report it.