When’s the last time you took a look at your average AR days? Most practices aren’t tracking this, and that can become a problem.
“Average AR days” refers to the average time that it takes for your practice to receive payments owed to you—in terms of accounts receivable—from patients and insurance claims. Most insurance companies pay at around 30 days. The industry average for AR days is 45, which means there is a 15-day buffer built in to allow for claims to be paid. If this number goes above 45, your cashflow is upside down and that’s not healthy for your practice.
There are several ways that paying attention to AR days can improve the financial health of your practice:
- It can indicate the amount of production your practice had during a specific time period.
- It reveals how quickly patients pay their bills.
- It indicates if your practice’s collections process is working well.
- It can help you understand the state of patient satisfaction.
- It highlights if there are issues with certain insurance providers.
- It shows if credit is being extended to patients that may not be credit worthy.
In the current environment, how quickly you are collecting your AR is a matter of survival. Being shut down for months with little or no revenue is obviously not sustainable. And even if you have reopened and your chairs are full, much of the dentistry you’re providing right now won’t be paid for until six weeks or more from now.
Think of it this way. If a patient receives treatment from you at a cost of $5,000 on July 1st, when will you see the full payment (patient portion + insurance portion) of that $5,000? Before COVID-19, the average time for a financially sound practice was 45 days. Meaning, treatment on July 1st, payment on August 15th. Since the onset of the pandemic, however, this number has doubled. That’s right, practices aren’t seeing that $5,000 for as many as 90 days or more. Multiply that by every patient and you can see the potential for a huge problem. Even though you still need to pay your employees, your vendors, and everything else included in your overhead each month, having a 90-day or longer gap between services provided and payment received isn’t viable.
So, what’s the action plan here? At the very least, you need to be aware. To understand that in order to counteract the fact that you’ve had little to no revenue coming in during the pandemic, you’re going to need to avoid a “business as usual” approach to your scheduling. Your first few months back need to be some of the highest-producing months your practice has ever had. Scattering a few high-dollar cases in between checkups and fillings is not going to be the best way to increase cashflow. You need to be strategic about scheduling so that your operatories are filled with the patients most in need of treatment and who are most likely to promptly pay you for that treatment.
Collection percentage
Another important stat that comes to light when tracking average AR days is your collection percentage. Collection percentage refers to the amount of dollars actually collected by your practice, divided by the gross production of the practice for a specific time period.
Why is collection percentage important? Aggregating the net production earned provides a critical insight to the overall financial health of your practice. To calculate the collection percentage of your net production, take your collections and divide by your net production (i.e. gross production less adjustments/write-offs.) At least 97% of all net production should be collected within 45 days of when the production occurred.
Knowing your gross production collection percentage becomes extremely valuable when you need to know how much production still needs to be scheduled in order to obtain your collection goal for the period. For example, if you wanted to collect $100,000 for the month, you can take the collection goal of $100,000, divide it by the gross collection percentage, and you will then have an estimated gross production amount needed to obtain your goal. This is what we call an actionable metric—a number you can actually improve by taking appropriate action.
Claims aging
Another way that paying attention to your average AR days helps your practice is with claims aging. How so? Let’s imagine a patient named John owes a total of $1,300, $1,250 of which has been billed to his insurance company, MetLife, 90+ days ago. In your practice management software’s AR report, you’ll see John’s outstanding AR balance is only $50. The truth is that you have an outstanding balance of $1,300 for John, but that’s not what your AR report shows. Clearly, having this amount past due is impacting your average AR days and is something you should be following up on to collect from both the patient and the insurance company. Practice management software does many important things very well. Claims aging isn’t one of them, and this is why. Not being able to see this important distinction about the total AR due (including insurance) versus only the amount billed to a patient is the equivalent of driving a car while blindfolded: It’s not something anyone would recommend.
Reducing average AR days
With all this being said, how exactly do you go about reducing your average AR days to 45 days or less? Although it is helpful to see the day-by-day AR day value of your practice, the real impact comes when you look at the trends. Here’s how that looks for one practice using our Dental Intelligence Growth Platform to view their 13-week trend (fig. 1):
As you can see, they fluctuate week by week, but on average are right around the target of 45 average AR days. A visual for this can be extremely helpful to someone responsible for the financial health of a dental practice, enabling them to engage with patients and insurance providers to resolve outstanding balances and improve their collection percentage.
So, what’s the bottom line? The person who oversees collections for your practice holds the key to your financial health and sustainability. In order for them to be effective in their efforts, they should absolutely be keeping track of average AR days. If they aren’t, they have a huge blind spot that could have serious consequences for the practice. For example, if a patient pays their portion of a bill and leaves the office, the report from the team member responsible for billing would tell the doctor, when asked, that the bill was paid. Actually, only the patient’s portion was paid, right? Of course, the doctor understands that a portion of the bill is outstanding pending insurance’s portion, but that amount can get lost in the busy day-to-day of the practice. But if the person responsible for collections is monitoring average AR days, they can easily see that an insurance payment is past due and reach out to collect. When this process is multiplied many times over, it can be the difference between a financially healthy practice and one that is struggling to survive.
By closely monitoring this metric, you become sensitive to fluctuations in either direction, and can respond accordingly. If a certain insurance provider is trending negative in how promptly they pay, average AR days can expose that trend. On the other hand, if certain patients have a history of not paying their balance within your established policy, you can also catch that and take the appropriate action. In either case, having this information empowers you to be proactive as opposed to reactive. This metric, and those that impact it, are key indicators of the condition of any dental practice. And yet very few (less than 10%, according to our analysis) are looking at average AR days.
If you are like most practices, you have no shortage of important things to pay attention to. If “important” is measured by impact, then you’ll want to add tracking average AR days to your to-do list. Doing so will yield significant benefits and will help you establish and sustain the growth you are working so hard to create.
Editor’s note: This article first appeared in Through the Loupes newsletter, a publication of the Endeavor Business Media Dental Group. Read more articles at this link and subscribe here.
