3 Accounts Receivable Metrics Every Doctor Should Know

Accounts receivable is the revenue you generated but have not yet collected. Understanding and monitoring A/R is vital to healthy cash flow for your practice.

When A/R gets out of hand, doctors lose out on the revenue they’re owed. Measuring relevant A/R benchmarks can shed valuable insight into your billing and collection processes.

Three common ways to monitor A/R is the Net Collection Rate, Days in A/R, and A/R Aging Buckets.

In this post we will summarize how to calculate each metric and briefly explain why including them in your monthly practice reports can help you spot irregular trends before they become bigger problems.

Net Collection Rate

The net collection rate (NCR) tells you how much you collected relative to what you expected to collect. The formula is collections divided by gross charges minus adjustments.

NCR = Collections / (Gross Charges – Adjustments)

For example, say in the month of January Dr. Jane had gross charges of $200,000 and adjusted off $30,000. If she collects $165,000 then her net collection rate would be 97% for the month.

A good practice will have a net collection rate between 95-100%. In our example, Dr. Jane averaged 98% for the year – not bad!

Notice that the NCR for Dr. Jane was above 100% in the month of September. How is that possible?

Net collection rate, as with most measurements, is a static snapshot in time. The money Dr. Jane collects in the month of September may have been charged a month or two earlier. Thus it’s important to realize that the NCR does not necessarily measure what was collected and generated in that month.

Measuring and monitoring your NCR helps in the following ways:

1. Spotting irregular trends – Monitored against a benchmark, deviations in your NCR might signal potential problems within your billing and collection department. This may prompt you to investigate and take action before there are any adverse effects to your cash flow.
2. Helps you monitor cash flow and create budgets – Knowing your average NCR can help you budget what money you expect to receive from your current A/R.

Days in A/R

Days in A/R measures the average number of days it takes to collect the payments due to the practice.

To calculate days in A/R, you first compute the average daily charges for the past year – simply divide gross charges for the year by 365. Then divide that result into your A/R balance.

Days in A/R = A/R Balance / (Annual Gross Charges / 365)

Continuing our example from above, Dr. Jane had $149,000 as her year-end A/R balance and $2,552,500 in gross charges for the year. Following the days in A/R calculation (149,000 / (2,552,500 / 365)) we find that at the end of 2018 the days in A/R is 21.

This means that it takes an average of 21 days for Dr. Jane to collect her payments.

Comparing days in A/R to a benchmark will help you make sense of what’s a good number. A lot depends on your payer contracts.

For instance, Medicare usually pays about 14 days after receiving a claim. So if the majority of your business is done with them, you should expect a lower number than a practice that contracts with HMOs that pay claims 45 days after receipt.

We like to use 45 days, or 1.5 months, as our benchmark. When days A/R creep above that threshold, it’s an indicator that we may need to investigate the billing department for process improvements.

A/R Aging Buckets

A third important measure for A/R is knowing how old it is. $100,000 of A/R 0-30 days old is much better than the same amount that has gone uncollected for over 90 days. Time is money when it comes to collecting A/R.

“According to the Commercial Collection Agency Section of the Commercial Law League of America, you are likely to receive 93.4% of money due you for bills 30 days out, 85.2% for bills 60 days out, and 73.1% for receipts out 90 days.” ¹

Aging buckets for A/R are typically categorized by 0-30 days, 31-60 days, 61-90 days, and over 90 days. To give each bucket a percentage, simply divide the amount in each category by the total A/R balance.

A high performing practice should have 70% of their A/R less than 30 days old and less than 10% outstanding over 90 days.

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Net collection rate, days in A/R, and aging buckets are three great metrics for monitoring your billing and collection processes.

Keeping track of these measures in your practice dashboard will help you monitor the health of your cash flow.

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REFERENCES:

1. Gorke, Jeffrey T. The Physicians Guide to the Business of Medicine: Dreams and Realities. Greenbranch Publishing, 2010.