The financial success of your practice can’t be evaluated through cash flow alone—it’s just one of several vital factors. Use this article as your guide to easily digest and better understand how to measure your practice’s financial health. You’ll learn in this article more on Finances and Your Medical Billing Practices.
Revenue Cycle Management: Key Metrics
Revenue cycle management includes:
- Tracking claims (days in accounts receivable)
- Making sure payment is received (adjusted collection rate)
- Following up on denied claims (denial rate) to maximize revenue generation
Calculating these three metrics can help you determine whether your revenue management cycle processes are efficient and effective.
Days in Accounts Receivable
Days in accounts receivable (A/R) refer to the average number of days it takes practice to collect payments. The lower the number, the faster the practice is obtaining payment, on average.
Watch the video to:
- Obtain a better understanding of days in A/R and why it’s crucial for your practice.
- Learn how to calculate days in A/R.
- Discover problems to avoid, including recognition of collection accounts, the impact of credits in calculating days in A/R, and insurance carriers whose days in A/R are higher than they should be.
Sample Calculation
- (Total Receivables – Credit Balance)/Average Daily Gross Charge Amount (Gross charges/365 days)
- Receivables: $70,000
- Credit balance: $5,000
- Gross charges: $600,000
- [$70,000 – ($5000)] / ($600,000/365 days)
- $65,000/1644 = 39.54 days in A/R
Calculating Days in A/R
First, calculate the practice’s average daily charges:
- Add all of the charges posted for a given period (e.g., three months, six months, 12 months).
- Subtract all credits received from the total number of charges.
- Divide the total charges, fewer credits received, by the total number of days in the selected period (e.g., 30 days, 90 days, 120 days, etc.).
Next, calculate the days in A/R by dividing the total receivables by the average daily charges.
Best Practice Tip
Days in A/R should stay below 50 days at a minimum; however, 30 to 40 days is preferable.
Sample Calculation
- (Total Receivables – Credit Balance)/Average Daily Gross Charge Amount (Gross charges/365 days)
- Receivables: $70,000
- Credit balance: $5,000
- Gross charges: $600,000
- [$70,000 – ($5000)] / ($600,000/365 days)
- $65,000/1644 = 39.54 days in A/R
Other Considerations
Understanding your practice’s revenue cycle will help you anticipate income and address issues preventing timely payments. Keep the following in mind when evaluating your revenue cycle and A/R processes:
- Slow-to-pay carriers. Some insurance carriers take longer to pay claims than the overall average number of days in A/R. For example, if your practice’s average days in A/R is 49.94, but Medicaid claims average 75 days, this should be addressed.
- The impact of credits. Be sure to subtract the credits from receivables to avoid a false, overly positive impression of your practice.
- Accounts in the collection. Accounts sent to a collection agency are written off of the current receivables. The revenue may not be accounted for in the calculation of days in A/R. Be sure to calculate days in A/R with and without the inclusion of collection revenue.
- Appropriate treatment of payment plans. Payment plans that extend the time patients have to pay accounts can result in an increase in days in A/R. Consider creating a separate account that includes all patients on payment plans and determine whether your practice should or should not have this “payer” in the calculation of days in A/R.
- Claims that have aged past 90 or 120 days. Good overall days in A/R can also mask elevated amounts in older receivables. Therefore it is important to use the “A/R greater than 120 days” benchmark.
Adjusted Collection Rate
The adjusted collection rate represents the percentage of reimbursement collected from the total amount allowed based on contractual agreements and other payments—i.e., what you collected versus what you could have/should have contained. This metric shows how much revenue is lost due to factors in the revenue cycle such as uncollectible bad debt, untimely filing, and other non-contractual adjustments.
Sample Calculation
- (Payments – Credits) / (Charges – Contractual Agreements) x 100
- Total payments: $500,000
- Refunds/credits: $14,000
- Total charges: $850,000
- Total write-offs: $350,000
- ($500,000 – $14,000) / ($850,000 – $350,000)
- $486,000 / $500,000
- 0.972 x 100
- Adjusted collection rate: 97.2%
Calculating Adjusted Collection Rate
To calculate the adjusted collection rate, divide payments (net of credits) by charges (net of approved contractual agreements) for the selected time frame and multiply by 100.
Best Practice Tips
- The adjusted collection rate should be 95%, at a minimum; the average collection rate is 95% to 99%. The highest performers achieve a minimum of 99%.
- Use a 12-month time frame when calculating the adjusted collection rate.
- Keep fee schedules and reimbursement schedules on hand to get an accurate picture of what you should have been paid and avoid inappropriate write-offs.
Other Considerations
Inappropriate write-offs.
One of the most common mistakes when posting payments is applying inappropriate adjustments to charges.
- For example, failing to distinguish between noncontractual adjustments and contractual adjustments results in a misleading view of how well your practice collects the money it has earned.
- Categorizing noncontractual adjustments (e.g., “untimely claims filing” or “failure to obtain prior authorizations”) will help reveal sources of errors and identify opportunities to improve revenue cycle performance.
Denial Rate
The denial rate represents the percentage of claims denied by payers during a given period. This metric quantifies the effectiveness of your revenue cycle management processes. For example, a low denial rate indicates cash flow is healthy, and fewer staff members are needed to maintain that cash flow.
Sample Calculation
- (Total of Claims Denied/Total of Claims Submitted)
- Total claims denied: $10,000
- Total claims submitted: $100,000
- Time period: 3 months
- $10,000/$100,000
- 0.10
- The denial rate for the quarter: 10%
Calculating Denial Rate
To calculate your practice’s denial rate, add the total dollar amount of claims denied by payers within a given period and divide by the total dollar amount of claims submitted within the given period.
Best Practice Tips
- A 5% to 10% denial rate is the industry average; keeping the denial rate below 5% is more desirable.
- Automated processes can help ensure your practice has lower denial rates and healthy cash flow.
Other Considerations
Failure to identify mistakes before claim submission. Mistakes made during coding and charge entry can result in adjudicated claims and rejection by a payer. Establishing an internal process to identify and correct any errors before claim submission will decrease denial rates and produce a healthier cash flow.
The denial rate represents the percentage of claims denied by payers during a given period. This metric quantifies the effectiveness of your revenue cycle management processes. For example, a low denial rate indicates cash flow is healthy, and fewer staff members are needed to maintain that cash flow.