Icon Manage Ar Key Processing Ratios
Manage A/R by Operationalizing Key Processing Ratios

Sleuthing systemic issues  //  Difficulty: Moderately Simple  //  Revenue Cycle Operations

Why run this play?

This is a simple way to measure how quickly your organization converts Receivables into cash and fully resolved zero balances. It will let you see if your A/R days will go up or down in the near future, and will show you how to intervene rapidly.

Background

Converting a receivable to cash is more of a manufacturing or assembly line metric, but it is often overlooked in mainstream healthcare finance.  To reduce days, the A/R must be converted to some combination of cash, adjustment, charity, or bad debt at a faster rate than new A/R being added to the overall A/R asset pool –  a ratio greater than 100%. If the ratio is less than 100%, then A/R will increase.

To determine where issues occur, three processing ratios are studied side by side:  

  1. Final Billed: Gross Revenue
  2. Conversion Rate:  A/R Moved to Final Bill
  3. Conversion Rate

If one ratio is consistently below 100%, this could indicate a problem (such as a non-budgeted volume decrease). Once you verify that there is a problem, you can analyze at the payer level. If all three metrics are operating at 100.01%, the Revenue Cycle is operating with minimal volatility.

To mitigate the risk of rising A/R Days, you can focus on increasing the velocity and amount of payments, properly adjusting accounts at appropriate times, and moving old accounts with no residual value off the A/R to charity or bad debt. Analyzing performance by payer can pinpoint opportunities even further.

Take Action

  1. Calculate Final Billed: Gross Revenue Ratio
    Calculation: Total Charges for all accounts where final billed date = current posting day / Gross Charges for the same posting day.


    This ratio measures the speed at which you code/finalize charts against new volume. If the ratio is just above 100, this is ideal. This indicates that as a patient (new revenue) enters the hospital, your staff  has taken all the necessary steps to get the account to final billed status without creating a backlog. If the FB:GR ratio is below 100%, this indicates that the staff and/or key business processes can’t keep up with new revenue, and you can expect DNFB to go up.


    Note: This is typically not a volume issue, but if the ratio is below 100%, the accounts are getting stuck somewhere.

  2. Calculate Conversion Rate of Moved to Final Bill
    Calculation: (Payments + Adjustments + Bad Debt Transfers + Charity Write-offs – Refunds (Credits)) where the final billed date is the prior day/ Total Charges for the prior day.

    This ratio measures how quickly staff is turning accounts into zero balance (paid in full) accounts, compared to what HIM (coding) is moving into the Final Billed (back office, CBO) population (and out of DNFB). If the ratio is under 100%, this indicates that the staff isn’t able to keep up with the workload, and won’t be able to turn it into a zero balance faster than new accounts come into their queue.

    If this ratio is >100%,  the CBO/Business Office is converting accounts faster than they are getting new accounts from HIM. Best practice is to monitor this ratio every day to see that it remains steady at 100.01%. If not, conduct a Payer Relational Study to identify root cause.

  3. Calculate Conversion Rate:
    Calculation: Payments + Adjustments + Bad Debt Transfers + Charity – Refunds / Gross Revenue:


    This ratio measures how well you convert all dollars into cash.  When new revenue is generated every day, you need to resolve the same amount of revenue.


    The Conversion Rate should be closely correlated to the Conversion of Moved to Final Bill metric. There is a key difference between these two metrics: The Conversion Ratio measures how efficiently you convert all new dollars, while the Conversion Rate of Moved to Final Bill measures how efficiently you convert the accounts flowing from HIM and/or Billing functions. If the ratio is under 100%, there is a bottleneck somewhere. If this ratio is >100%, the CBO/Business Office is converting accounts faster than they are getting new accounts.

    We recommend looking at these ratios by financial class and by dispositions/hold codes and/or status codes that explain why each account is getting stuck. Best practice is to monitor these ratios every day to see if they remain steady at 100.01% or greater. If not, work to identify root cause immediately.

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How to Calculate This Play's Value

There are many ways that operationalizing these three Key Processing Ratios will create value:


ROI best practices in includes:

  1. Developing new Revenue Cycle leaders – The discipline of studying (and acting on) Key Ratios as a morning routine is one of the best ways to teach future leaders where fractures and opportunities reside. This translates into fewer unpleasant surprises, and lets workers surgically attack problems within one day of their occurrence, instead of weeks later.

  2. Organizational alignment – Often Revenue Cycle Operations teams are back-end heavy with respect to Key Performance Indicators. The HIM/Coding team gets blamed for downstream problems by PFS, often. But these three Key Processing Ratios tie the Revenue Cycle together. If FB:GR Ratio dips, there is no need for a reactive response, and endless meetings, because the entire team knows where the challenge lies, and can quickly collaborate on strategies, offer resources, and even adjust targets to a more reasonable number.

  3. The power of asking why – These three Key Processing Ratios are part of a dialogue between Key Leading and Lagging Indicators that provides true command. For example:

    • “Cash is down but Conversion Rate is > 100%”

    • “Why?”

    • “Contractuals are trending far too high month to date, artificially reducing days”

Data Driven Response – “Medicare’s Conversion rate is 147% but Cash is below target by 2%. We have denials flowing through Medicare this month. Let’s isolate Medicare denials (and/or underpayments) and get ahead of this.”


Hard ROI is produced by class value drivers that include:

  1. Cash acceleration to knowing where to focus.

  2. New Net Revenue due to quickly identifying payment discrepancies and potential denials.

  3. Bad Debt Expense reduction and smoothing through material reductions in volatility.


**Bonus Fourth Key Ratio for Consideration**
If your organization struggles with Clean Claims (as pinpointed by metrics such as Held Claims Days for FBNS > 1 Day in Revenue Outstanding), then an FB:SC (Moved to Final Billed: Submitted Claims) Ratio will bring this problem to the surface in an actionable way for leaders to resolve,


For every dollar that moves from DNFB to FB, $1.01+ must be submitted, or 0-30 aging will increase. Delayed Cash will hide in the FB receivable, having never been submitted to the payer for resolution.

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