Manage Four Key Revenue Cycle Metrics
By Jim Denny, MBA
Every practice knows that cash flow is a key indicator of financial health, but other key metrics should be evaluated to see the true state of a practice. By regularly looking at the number of days in accounts receivable (A/R), A/R greater than 120 days, collection rate, and denial rate, for example, you can gain a much greater sense of how your practice is performing—and where it can improve. Each of these metrics can easily be calculated and analyzed to help improve your revenue cycle.
Formulate Number of Days in A/R
How many days a claim sits in A/R is perhaps the single most important revenue cycle metric; it tells a practice the number of days money owed remains unpaid. Although vital to any practice’s finances, this statistic is not difficult to calculate. First, to properly account for volume, the calculation for days in A/R should feature outstanding dollars based on a practice’s average daily charge. Next, follow these steps to correctly arrive at days in A/R:
- Step 1: Determine your total current receivables, and then subtract any credits. Credits are funds owed by the practice to others. They offset receivables, so subtract credits from receivables. Otherwise, days in A/R will appear overly optimistic.
- Step 2: Determine your average daily charge amount by dividing total gross charges for the last 12 months by 365 days (to represent the previous 12-month period).
- Step 3: Divide the total from Step 1 (receivables) by the total from Step 2 (charge amount).
The formula looks like this: (Total Current Receivables After Credits) ÷ (Average Daily Charge Amount) = Days in A/R
In some cases—for example, after a new physician joins—a practice may want to calculate the average daily charge on a three-month, instead of a 12-month, period (just be sure to divide the previous three months by 90 days instead of 365 days). Either way is fine, as long as you use the metric consistently.
Days in A/R can mask areas of underperformance that practices should watch, including:
- Payer-specific delays—Overall days in A/R could be 45, but Medicaid claims might average 75 and warn of a problem that needs attention.
Tip: In addition to calculating overall days in A/R, also calculate it by payer to avoid missing potential problems.
- Collection accounts—Accounts sent to a collection agency are often written off the current receivables. As a result, they are not part of the days in A/R equation. Sending accounts to collections may improve days in A/R, but camouflage deeper issues.
Tip: Calculate days in A/R with and without accounts sent to collections to see a true picture of the situation.
- Payment plans—Payment plans allow days in A/R to rise by offering additional time for reimbursement.
Tip: Create and designate payment plans as a separate “payer.” That way, days in A/R can be calculated with or without payment plans taken into account.
- Aged claims—Good overall days in A/R still can hide elevated amounts in the older aging buckets (e.g., past 90 or 120 days).
Tip: Monitor these statistics separately.
On the whole, an A/R greater than 50 days generally indicates the need for improvement. Average practices usually see A/R of 35 to 50 days, with top performing practices often boasting A/R of less than 35 days.
Monitor Percentage of A/R Greater than 120 Days
The percentage of A/R greater than 120 days old (A/R > 120) is a measure of a practice’s ability to obtain timely reimbursement. As indicated earlier, it should be monitored with overall days in A/R for a more accurate view of revenue strength.
The formula to calculate percentage of A/R > 120:
Dollar Amount of A/R>120 from Date of
Service ÷ Dollar Amount of Total A/R
An A/R > 120 greater than 25 percent indicates an area of weakness. Most practices average A/R > 120 between 12 and 25 percent, while best performers may see A/R > 120 below 12 percent.
Tip: Make sure you base this calculation on the actual age of a claim (i.e., the date of service). Otherwise, if a claim is “re-aged” to “zero” every time it moves from one payer to another, a practice can end up with a falsely positive impression of performance.
Calculate Adjusted Collection Rate
The adjusted (or net) collection rate shows the percentage of collected reimbursement in comparison to the allowed amount based on a practice’s contractual obligations. In other words, it reveals how effectively a practice collects all legitimate reimbursement.
Calculate the adjusted collection rate this way:
- [Payments (Minus Credits)] ÷ [Charges (Minus Approved Contractual Adjustments)]
Do this for a selected time frame. A practice that cannot accurately match payments with their originating charges may want to consider using data aged approximately six months to ensure most of the claims used in the calculation have cleared.
A common mistake is to include inappropriate write-offs in the calculation. This can happen when applying inappropriate charge adjustments while posting payments (for example, lumping non-contractual adjustments and contractual adjustments together). Solve this dilemma by distinguishing between the two sets of adjustments, and tracking contractual adjustments based on reason.
An adjusted collection rate less than 95 is considered poor. On average, practices have an adjusted collection rate between 95 and 99 percent, with high performers achieving an adjusted collection rate higher than 99 percent.
Keep Denial Rates Low
Denial rate is the percentage of claims denied by payers. The lower this number, the better a practice’s cash flow—and the less staff needed to maintain that cash flow. Automating processes through real-time eligibility tools and online claims editing capability, for instance, can lower this ratio dramatically.
The formula to calculate denial rate is:
- Total Dollar Amount of Denied Claims ÷ Total Dollar Amount of Submitted Claims
Again, select the amounts from a designated time period. Practices may want to use denied charge line items, divided by total submitted charge line items.
Denial rates greater than 10 percent reveal weaknesses. Most practices experience denial rates between 5 and 10 percent, with top performers coming in with denial rates lower than 5 percent.
One denial rate “best practice” is to catch potential mistakes before claims go out the door. Well-run business offices edit charges—and reject claims—via internal systems before those claims are sent to a payer. A high internal claims rejection rate may actually predict a lower payer denial rate, which ultimately means improved cash flow. Using a clearinghouse or claims scrubber to spot errors offers a two-fold payback: A denial is prevented and a delay in final payment posting is avoided.
Assess Financial Strength
Ongoing monitoring of these key metrics is essential to improved revenue cycle performance. With the right tools, a practice can keep a steady eye on key revenue cycle metrics—and experience fewer denials, faster payment, and greater profitability.
Jim Denny, MBA, is founder, president, and CEO of Navicure, a leading medical claims clearinghouse.