Introduction:

Efficient revenue cycle management (RCM) is vital for the financial success and sustainability of medical practices. To assess the overall health of a practice’s revenue cycle, various key metrics are used. These metrics provide valuable insights into the performance of revenue-related processes, identify areas for improvement, and help healthcare providers optimize their financial outcomes. In this blog, we will explore the key metrics used in healthcare revenue cycle management to assess the health of medical practices and provide practical guidance on leveraging these metrics to enhance financial performance.

Days in Accounts Receivable (AR):

Days in Accounts Receivable (AR) AKA DSO (Daily Sales Outstanding) is a key metric used in healthcare revenue cycle management to measure the average number of days it takes for a medical practice to collect payments for services rendered. It provides insights into the efficiency of the revenue cycle process and the effectiveness of the team collecting outstanding accounts.

To understand Days in AR, let’s consider an example:

XYZ Medical Clinic provides various healthcare services to its patients. Over a specific period, let’s say one month, the clinic generates $100,000 in total charges for the services provided. Out of this amount, $80,000 is billed to insurance companies, and $20,000 is billed directly to patients as their responsibility.

Now, let’s assume that the clinic has an average daily charge rate of $3,333.33 (calculated as $100,000 divided by 30 days in the month). It means that on average, the clinic generates approximately $3,333.33 in charges each day.

Once the claims are submitted to the insurance companies, they undergo the claims processing and adjudication process. This process can take some time, typically ranging from a few days to several weeks, depending on the payer’s policies and the complexity of the claims.

For this example, let’s assume that it takes an average of 45 days from the date of service to receive payment from insurance companies for the billed amount.

To calculate Days in AR for insurance claims:

Step 1: Determine the total insurance AR balance at the end of the month.

If the total charges billed to insurance companies during the month were $80,000, and let’s say $60,000 is still outstanding (awaiting payment), the insurance AR balance would be $60,000.

Step 2: Calculate the average daily charges billed to insurance companies.

In this example, the average daily charge rate is $3,333.33.

Step 3: Divide the insurance AR balance by the average daily charge rate.

$60,000 / $3,333.33 = 18 days

In this scenario, the Days in AR for insurance claims would be 18 days. It means that, on average, it takes approximately 18 days for the clinic to collect payment for services billed to insurance companies.

It’s important to note that Days in AR can be calculated separately for insurance claims and patient responsibility (self-pay) claims. The calculation for patient responsibility claims would involve considering the outstanding balance from patient payments and determining the average daily patient responsibility charges.

By tracking Days in AR over time, healthcare practices can identify trends, evaluate the effectiveness of their revenue cycle management processes, and implement strategies to reduce the number of days it takes to collect payments, ultimately improving their financial health and cash flow.

In the healthcare industry, an average of 30 to 40 days in AR is often considered acceptable or within a reasonable range. However, practices strive to achieve a lower number of days, aiming for 25 days or fewer.

Collection Rate

Collection rate is a financial metric used in healthcare revenue cycle management to measure the percentage of billed charges that a medical practice successfully collects. It reflects the effectiveness of the practice’s efforts in collecting payments for services provided.

To understand Collection rate, let’s consider an example:

XYZ Medical Group provides healthcare services to its patients and bills a total of $100,000 for services rendered during a specific period. This amount includes charges billed to insurance companies and patient responsibility.

Now, let’s assume that XYZ Medical Group successfully collects $90,000 out of the total $100,000 billed charges. The remaining $10,000 represents outstanding or uncollected accounts.

To calculate the Collection rate:

Step 1: Determine the total billed charges. In this example, the total billed charges are $100,000.

Step 2: Determine the total amount collected. In this example, the total amount collected is $90,000.

Step 3: Divide the total amount collected by the total billed charges and multiply by 100 to get the Collection rate as a percentage.

($90,000 / $100,000) * 100 = 90%

In this scenario, the Collection rate for XYZ Medical Group would be 90%. It means that the practice successfully collected 90% of the total billed charges.

A higher Collection rate indicates that the practice has a more effective revenue cycle management process and is successful in collecting a significant portion of the charges. On the other hand, a lower Collection rate may indicate inefficiencies in the billing and collection process, resulting in uncollected accounts and potential financial challenges.

Monitoring the Collection rate over time is essential to evaluate the financial health of the practice and identify areas for improvement. By implementing strategies to enhance billing accuracy, improve claims processing, address denials promptly, and optimize patient payment processes, medical practices can aim to achieve a higher Collection rate, leading to improved financial stability and profitability.

The specific ideal collection rate can differ from one practice to another depending upon their charge amount and payer mix.

Net Collection Rate

Net collection rate is a financial metric used in healthcare revenue cycle management to measure the effectiveness of a medical practice’s collections process. It represents the percentage of billed charges that the practice successfully collects after accounting for any contractual adjustments or write-offs.

To understand the net collection rate, let’s consider an example:

XYZ Medical Group bills a total of $100,000 for services provided to patients. After submitting claims to insurance companies and accounting for any contractual adjustments, the allowed amount (the amount the insurance agrees to pay) is determined to be $80,000. Out of the $80,000 allowed amount, XYZ Medical Group successfully collects $70,000 as reimbursement.

To calculate the net collection rate:

Step 1: Determine the allowed amount.

In this example, the allowed amount is $80,000.

Step 2: Determine the amount collected.

In this example, the amount collected is $70,000.

Step 3: Divide the amount collected by the allowed amount and multiply by 100 to get the net collection rate as a percentage.

($70,000 / $80,000) * 100 = 87.5%

In this scenario, the net collection rate for XYZ Medical Group would be 87.5%. It means that the practice successfully collected 87.5% of the allowed amount after accounting for any contractual adjustments or write-offs.

The net collection rate takes into account the impact of contractual adjustments, which are often based on negotiated rates between the practice and insurance payers. It provides a more accurate representation of the actual revenue collected by the practice.

A higher net collection rate indicates a more effective collections process, while a lower net collection rate may suggest inefficiencies in collections or challenges in securing payment from insurance companies. Monitoring the net collection rate over time helps medical practices assess the effectiveness of their revenue cycle management processes and identify areas for improvement.

By implementing strategies to reduce denials, improve claims processing, optimize reimbursement, and effectively manage write-offs, medical practices can work towards achieving a higher net collection rate, leading to improved financial performance and revenue optimization.

While the specific ideal net collection rate can differ from one practice to another, a net collection rate of 95% or higher is often considered excellent. This means that the practice collects 95% or more of the allowed amount after accounting for contractual adjustments or write-offs.

Clean Claim Rate

Clean claim rate is a metric used in healthcare revenue cycle management to measure the percentage of claims that are submitted without errors or deficiencies, requiring minimal or no additional follow-up or rework. It reflects the effectiveness of the billing and claims submission process in a medical practice.

To understand the clean claim rate, let’s consider an example:

XYZ Medical Clinic submits a total of 100 claims to various insurance companies for reimbursement of services provided to patients. Out of these 100 claims, 85 claims are processed and paid without any issues or additional requests for information. The remaining 15 claims are either denied or require further documentation or clarification.

To calculate the clean claim rate:

Step 1: Determine the total number of claims submitted. In this example, the total number of claims submitted is 100.

Step 2: Determine the number of clean claims (claims processed and paid without errors). In this example, the number of clean claims is 85.

Step 3: Divide the number of clean claims by the total number of claims submitted and multiply by 100 to get the clean claim rate as a percentage.

(85 / 100) * 100 = 85%

In this scenario, the clean claim rate for XYZ Medical Clinic would be 85%. It means that 85% of the claims submitted were processed and paid without errors or deficiencies, requiring minimal or no additional follow-up.

A higher clean claim rate indicates a more efficient billing and claims submission process, resulting in fewer claim denials, reduced rework, and faster reimbursement. It signifies that the medical practice is effectively submitting accurate and complete claims, which improves cash flow and reduces administrative burden.

Monitoring the clean claim rate over time is important to evaluate the effectiveness of the revenue cycle management process and identify areas for improvement. By implementing strategies such as thorough claim scrubbing, proper documentation, accurate coding, and continuous staff training, medical practices can aim to achieve a higher clean claim rate, leading to improved financial performance and operational efficiency.

While the specific ideal clean claim rate can differ from one practice to another, a clean claim rate of 90% or higher is often considered excellent. This means that the practice achieves a clean resolution for 90% or more of the claims submitted.

Accounts Receivable Aging

Accounts Receivable Aging is a financial analysis tool used in healthcare revenue cycle management to track and categorize outstanding accounts based on the length of time they have been unpaid. It provides insights into the aging of receivables and helps identify delinquent accounts, allowing medical practices to prioritize and take appropriate actions for collection.

To understand Accounts Receivable Aging, let’s consider an example

XYZ Medical Clinic provides healthcare services to its patients and maintains a list of outstanding accounts receivable. The clinic categorizes these accounts based on the length of time they have been unpaid, typically in intervals such as 0-30 days, 31-60 days, 61-90 days, 91-120 days and over 120 days.

Let’s assume XYZ Medical Clinic has the following outstanding accounts receivable balances:

$25,000 in accounts unpaid for 0-30 days

$10,000 in accounts unpaid for 31-60 days

$5,000 in accounts unpaid for 61-90 days

$2,500 in accounts unpaid for 91-120 days

$7,500 in accounts unpaid for over 120 days

To calculate Accounts Receivable Aging:

Step 1: Determine the outstanding balance for each aging category.

In this example, the outstanding balances for each category are:

0-30 days: $25,000

31-60 days: $10,000

61-90 days: $5,000

91-120 days: $2,500

Over 120 days: $7,500

Step 2: Total the outstanding balances across all aging categories.

In this example, the total outstanding accounts receivable balance is $25,000 + $10,000 + $5,000 + $2,500 + $7,500 = $50,000.

Step 3: Determine the percentage of the outstanding balance for each aging category.

To calculate the percentage, divide the outstanding balance for each category by the total outstanding accounts receivable balance and multiply by 100.

Percentage of 0-30 days: ($25,000 / $50,000) * 100 = 50%

Percentage of 31-60 days: ($10,000 / $50,000) * 100 = 20%

Percentage of 61-90 days: ($5,000 / $50,000) * 100  = 10%

Percentage of 91-120 days:  ($2,500 / $50,000) * 100 = 5%

Percentage of over 120 days: ($7,500 / $50,000) * 100 = 15%

In this scenario, XYZ Medical Clinic’s Accounts Receivable Aging analysis reveals that 50% of the outstanding balance is in the 0-30 days category, 20% is in the 31-60 days category, 10% is in the 61-90 days category, 5% is in the 91-120 days category  and 15% is in the over 120 days category.

The Accounts Receivable Aging analysis helps medical practices identify the aging of their receivables and take appropriate actions. It allows them to focus on collecting payments for the accounts that have been outstanding for a longer period, implement strategies to reduce aging, and improve cash flow.

While the specific ideal Accounts Receivable Aging will depend on the payer mix, specialty and Geographical location of the practice and it can differ from one practice to another.

0-30 days: It is ideal to have a significant portion of the outstanding AR in this category. A high percentage (e.g., 70% or more) in the 0-30 days category is considered excellent.

31-60 days: Ideally, a lower percentage (e.g., 15-20%) of the outstanding AR should fall into this category, indicating that only a small portion of accounts are slightly delayed in payment.

61-90 days: An ideal percentage (e.g., 5-10%) in this category suggests that the practice has minimal accounts that are overdue by 61 to 90 days.

91-120 days: The ideal percentage of the outstanding AR in this category should be relatively low (e.g., 3-5%). It indicates that the practice has a small number of accounts that are significantly overdue.

Over 120 Days: The ideal percentage of the outstanding AR in this category should be relatively low (e.g., 5% or less). It indicates that the practice is managing its revenue cycle efficiently.

Conclusion

Effective healthcare revenue cycle management is essential for the financial well-being of medical practices. By utilizing key metrics such as Days in AR, Collection Rate, Net Collection Rate, Clean Claim Rate and Accounts Receivable Aging, healthcare providers can gain valuable insights into the performance of their revenue cycle and identify areas for improvement. By proactively monitoring and optimizing these metrics, medical practices can enhance their financial health, streamline billing processes, minimize revenue leakage, and ultimately provide better care to their patients.