In sailing a boat, the biggest consideration is the wind: Where it’s coming from and how much.
In running a Medical practice, the biggest consideration is cash in the door: Where it’s coming from and how much.
So how do I start to get a read on my finances, the clinic’s wind? Well, part of the answer is to find the average number of days it takes to collect on payments due to my practice, or Days in AR (accounts receivable).
We’ve all heard it before: “Days in AR! If only we could speed up collections, we’d be in great shape!”
Problem with that approach: Days in AR is a measurement, not a solution. Once I know my Days in AR, I can start to figure out why my Days in AR is whatever it is, like 42. Then I can ask “Why are my Days in AR 42?” And while those who have read The Hitchhiker’s Guide will tell me there is nothing more I need to know than the number 42, in Medical Billing, my friend, 42 is the beginning of knowledge, not the end: Days in AR is a metric, just like which direction the wind is coming from is a metric: I still know nothing about boat speed, where the harbor is, how long it’ll take me to get there: nothing. And besides, everybody knows Sailing Is The Answer, not 42.
Now, 42 may or may not be good: for example, if your AR is 22 (suspiciously fast), maybe your Billing staff is writing claims off it ought to be trying to collect; if it’s 52 (suspiciously slow) maybe the Front Desk isn’t getting good or complete demographics on patient check-in; that’s messing up claims, creating work for your Billers which adversely affects Days in AR. If that’s the case, when you ask the Billers with a stern look why average Days in AR is 52 they’ll start writing claims off to stay out of trouble, Captain, and that’s not good. I’d rather they were fixing the demographics, resubmitting claims, talking to Front Desk folks about getting clean demographics in from the get-go on patient check-in.
Hey, now I’m satisfied that Days in AR is 52: my Billers are taking time to address issues, getting more claims paid, working with the Front Desk on data accuracy… good stuff. In this case I want a longer Turn Ratio while my staff works it out, and as they do my Turn Ratio oughta get better all on it’s lonesome: won’t even have to bug ‘em. What could be better than that? Other than Sailing, of course.
There’s a two-part formula to figure Days in AR out:
1) get Charges posted over a specific period of time (ex: past 6 months) and divide that by the total number of days in those months. Typically, a Production report (name dependent on your software) will tell you what your average daily charges are, and then
2) Divide your total AR by your average daily charges. Got it? Me, I’m just a computer nerd who’d rather be sailing, so I had to take several stabs at it, but here’s what I got when I ran some fictitious numbers:
I charged $300K in the last 6 months; there were 182 days in those 6 months; my total current AR is $80K (typically an Aged AR report). That means I gotta:
• Divide 300,000 by 182 which = 1648.35
• Divide 80,000 by 1648.35 which = 48.53
And Hey Presto! Answer: average Days in AR is 48.53. I’ve got a KPI! There’s wind (money) to sail with! Now I can ask a question: why is my Turn Ratio KPI 48.5? I wonder what I will find…