How to Decrease Your Average AR Days (and master collections!)

By closely monitoring AR Days, you become sensitive to fluctuations in either direction and can respond accordingly.

Dental Intelligence

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September 3, 2021

 

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.

So, what exactly is Average AR Days? It’s the average time that it takes for your practice to receive payments owed to you — in terms of receivables — from your patients and from insurance claims.

Most insurance companies pay at around 30 days. The industry average for AR Days is 45 days, which means there is a 15-day buffer built in to allow for claims to be paid. If this number goes above 45 days, 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:

In today's practice environment, how quickly you're collecting your AR balances is a matter of survival. If you are taking more than 45 days to collect from insurance and patients, your ability to pay yourself and your team and manage overhead could be compromised. Getting to 45 Average AR Days or less is an urgent priority. 

woman looking at past-due bills

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 start of the pandemic, however, this number 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.

Collection Percentage

One of the other important things you can learn from tracking your average AR Days is your collection percentage. Collection Percentage is 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? Collecting the net production earned provides a critical insight to the overall financial health of your practice. The process for calculating the collection % of your net production is done by taking your collections and dividing it 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 % 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 %, 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 action to do so.

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 to you, $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 the reason why. Not being able to see this important distinction about the total AR due (including insurance) vs. 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 this practice using our Dental Intelligence to view their 13-Week trend:

Screen-Shot-2022-03-16-at-2.24.56-PM

As you see here, they fluctuate up and down, week by week, but on average are right around the target of 45 average AR Days. Having a way to visualize 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 collections %.

 

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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 not, you have a huge blind spot that could have serious consequences for your 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 busyness of managing the day-to-day practice. But if the person responsible for collections is on top of the average AR Days number, 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 appropriate action. In either case, having this information enables you to act instead of just reacting. This metric, and those that impact it, are key indicators about the condition of any dental practice. And yet very few practices (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.

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