March 01, 2016
Revenue Cycle 6: How Minimizing A/R Days Maximizes Cash Flow
We’ve said it before on this very blog, but it’s a critical notion that bears repeating: Every day that a claim sits in a payor’s system is a day that your practice, physicians or facility doesn’t get paid. These claims awaiting payment are called accounts receivable (A/R), and each day a claim is in A/R is costing you. And it could be costing you potentially tens of thousands of dollars a year.
That might sound like a scare tactic, but it’s reality for many hospitals, facilities and providers. Your situation might not be so extreme, but do you really know the extent to which A/R days are costing you? Read on for a primer on how to calculate A/R days, understanding the financial costs of extra days, and some tips for minimizing the wait.
Calculating your A/R days
Before you can figure out how much A/R days cost, the first step is calculating your claims’ average days in A/R. To calculate days in AR, compute the average daily charges for the past several months — add the charges posted for the last six months and divide by the total number of days in those months. Divide the total accounts receivable by the average daily charges. The result is the days in accounts receivable.
If your coding and billing department is doing well, days in A/R should be fewer than 50 — although 30 to 40 days is preferable. Some experts might say you should aim for under 30 days in A/R, but that may be unrealistic for most care settings, particularly hospitals and emergency departments. In any case, average A/R of 60 days or longer is considered below standard.
How days in A/R cost you
Now that you know your days in A/R, you can better understand the financial impact of having this money floating around a payor’s system. To do this, you have to do a little digging to determine the cost of your borrowing — you’ll need to know the interest rates on loans (such as the mortgage on the facility, or loans for capital equipment), because not paying these down is what’s costing you money.
In this hypothetical example, each day that goes by where those claims are unpaid costs the practice about $1700. That’s enough to get ahead on the loan interest that drains your facility or practice’s value — or to pay for another coding and billing person or a medical scribe who alleviates the physician workload.
Overview of strategies that can help
Thankfully, there are steps you can take to minimize days in A/R, such as collecting accurate and thorough patient information from the front office, getting patient co-pays up front, effective charge capture, maximizing the use and features of your information systems and ensuring clean codes are generated. You can read in more depth about these strategies here. ScribeAmerica’s Business Development team is also available to help discuss strategies at firstname.lastname@example.org.