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Using Benchmarks Correctly: Days in A/R and Net Collections Percentage

Using benchmarks to rate the success of your practice’s revenue cycle is an age-old “best practice.” No matter the specialty or size of your practice, it is important to periodically track, trend, and review performance data. It is the only surefire way to understand your financial strengths and weaknesses, and subsequently improve both.

One of the biggest challenges I’ve found, however, is that practices may think they’re adequately tracking certain benchmarks when they’re not. In reality, it’s not at all unusual for practices to be a little uncertain about whether they’re correctly calculating and analyzing important numbers.

So, I’d like to address two standard benchmarks that, in my experience, are particularly thorny: days in accounts receivable (A/R) and net collections percentage. It’s essential to track both accurately, because they demonstrate a practice’s ability to quickly turn over A/R and collect all money due. Let’s walk through: the definition of each term; the proper way to calculate each; an example calculation; and some common potential analysis pitfalls.

Days in A/R first. This is a measure of the rate of A/R turnover. It represents the number of days of A/R outstanding, based on the practice’s average daily charge volume.

Here’s how to calculate it: Take your total A/R divided by the practice’s average daily charge amount. (For the average daily charge, divide total charges for the last three months by 90.3 days, representing three months).

For example: If total charges for three months equal $81,270, the average daily charge equals $900 ($81,270/90.3). If total outstanding A/R is $50,000, days in A/R equals $50,000/$900, which is 55.55 days.
Once you have your number, it is important to recognize that a good overall level of days in A/R can hide areas of underperformance, including:

  • Specific insurance carriers whose days in A/R are higher than they should be. For example, if your entire practice days in A/R level is 45 (good), but your Medicare days in A/R level is 48 (not good), there is a problem with Medicare that needs to be addressed. If you don’t break out days in A/R by payer, you may be missing potential trouble-spots.
  • Claims that have aged past 90 or 120 days. A good overall days in A/R level also can hide elevated amounts in the older aging buckets. That’s why it’s so important to utilize the “A/R>90 days” benchmark. (Note: Check back to the blog in the coming weeks, when I’ll develop a further discussion on this aging benchmark).

Now let’s take a look at net collections percentage, which is a measure of a practice’s effectiveness in collecting all legitimate reimbursement. This figure reveals how much revenue is lost due to factors such as: uncollectible bad debt; untimely filing; inappropriate adjustments; payment posting errors; or claim underpayments.

Here’s how to calculate it:  Divide payments (less refunds) by charges (less approved write-offs) for the selected time frame. This calculation should be based on dates of service—that way you avoid comparing charges generated in the current month with payments and adjustments taken on claims from many prior months, which can lead to great fluctuations for this calculation. Additionally, it’s recommended that you perform this calculation utilizing aged data, typically from 4-6 months back, so that you ensure a majority of the claims used for the calculation have had ample time to clear.

For example: For dates of service 10/1/2009 through 12/31/2009, payments equal $485,698.75, refunds equal $13,368.75, total charges equal $842,985.00, and total approved write-offs equal $344,500.73. Divide payments less refunds ($485,698.75 -$13,368.75) by charges less approved write-offs ($842,985.00 – $344,500.73), then multiply by 100. The total net collections percentage comes to 94.75%.

Potential pitfalls when it comes to this calculation include:

  • Counting inappropriate write-offs as part of the calculation. This is one of the most common mistakes that practices make. Inappropriately adjusting off a balance while posting payments, adjusting off a patient balance due to a physician order, etc., provides an inaccurate view of a practice’s ability to collect on all monies “earned.”
  • Not having access to your fee schedules or reimbursement schemas for each payer. This will disable the practice from truly knowing what should have been paid, adding to the aforementioned inappropriate write-offs.

I hope these suggestions for calculating days in A/R and net collections percentage prove beneficial. If you stay tuned, I’ll post a similar blog in the upcoming weeks to describe how to correctly perform calculations for “lag time” (e.g., between date of service and date of submission) and A/R>90 days.

For more information, download Navicure’s resource guide, Key Metrics in Revenue Cycle Management, which identifies four critical KPIs and gives detailed instructions for calculating them.