How to Calculate AR Days in Medical Billing
Understand how to accurately determine AR days in medical billing. This essential calculation provides key insights into your practice's financial flow.
Accounts Receivable (AR) days in medical billing measure the average number of days it takes a practice to collect payments for services rendered. These payments can originate from patients or various insurance companies. Tracking AR days is important for assessing the efficiency of a medical practice’s billing and collection processes.
Defining the Calculation’s Core Elements
The calculation of AR days relies on two primary components: Accounts Receivable (AR) and Average Daily Charges. Accounts Receivable in medical billing encompasses the total outstanding money owed to the practice for healthcare services that have already been provided. This includes unpaid balances from patients, such as co-pays or deductibles, and claims that are pending payment from insurance companies.
Average Daily Charges represent the average amount of gross charges generated by the practice each day over a specified period. To determine this, the total gross charges for a given period are divided by the number of days in that same period. Using gross charges, rather than net collections, is important because gross charges reflect the total billed amount before any adjustments or write-offs.
Gathering Required Financial Data
Obtaining the specific numerical data for the AR days calculation involves accessing financial reports from a practice’s management systems. The total Accounts Receivable figure can be pulled from a practice management system (PMS) or an electronic health record (EHR) system’s financial reporting module.
The total gross charges for the chosen period are found within these same billing or accounting software systems. It is important to ensure these figures reflect gross charges, which are the total invoice amounts prior to any insurance adjustments or other deductions.
Applying the Calculation Formula
Once the necessary financial data has been gathered, the AR days can be calculated using a specific formula. The standard formula for AR days is: (Total Accounts Receivable / Total Gross Charges for a Period) x Number of Days in the Period.
To apply this, first determine the average daily charges by dividing the total gross charges for a given period by the number of days in that period. For instance, if a practice had $450,000 in total gross charges over the last 90 days, the average daily charges would be $5,000 ($450,000 / 90 days).
Next, take the practice’s current Total Accounts Receivable. If the Total Accounts Receivable is $150,000, the calculation becomes ($150,000 / $5,000) = 30. This result indicates that, on average, it takes the practice 30 days to collect its outstanding payments.
Interpreting the Calculated Value
The calculated AR days value indicates the average length of time it takes a medical practice to convert its outstanding revenue into cash. A lower number of AR days signifies efficient billing and collection processes, leading to healthier cash flow. Conversely, a higher AR days figure can point to inefficiencies in the revenue cycle, such as delayed claims processing, high denial rates, or slow patient payments.
Benchmarks for AR days vary by medical specialty and payer mix. Many high-performing healthcare organizations aim to maintain AR days between 30 and 40 days. An AR days value exceeding 50 days suggests potential financial challenges or areas for process improvement within the practice. Monitoring this metric helps practices identify and address issues that could affect their financial stability and ability to fund operations.