Days sales outstanding – widely known as DSO – is a measure of accounts receivable (AR) compared to sales or revenue. It is also a measure of the performance of the revenue cycle process for a healthcare organization. For long-term post-acute care (LTPAC) organizations, DSO is considered an essential key performance indicator (KPI) that is reviewed by management on a monthly basis.
long-term care, administrators and managers often have enough on their plate and can’t be involved in day-to-day AR operations. That area is left to the business office or billing firm. Yet, administrators, owners and managers must be confident that their business office is fulfilling their responsibilities, and the quickest way to do this is to start by analyzing the DSO.
Understanding DSO for LTPAC Organizations – What It Is, and How It’s Used
In general terms, DSO tells you how many days a particular charge stays on the books before being collected or resolved. In other words, from the time a charge is booked, how long does it take to collect on that charge. In order to calculate DSO, it’s necessary to first come up with the average daily revenue. To do that, take three months of revenue and divide that by three months of census days to get the average daily revenue. Once you arrive at that, divide that number into the total accounts receivable (AR), and you’ll have the DSO. Consider an example:
Monthly revenue for ABC Nursing Home: $500,000
If that month (September) has 30 days, the prior two months would total 62 days
$1,500,000 / 92 days = $16,667 average daily revenue
The total outstanding AR at the end of September for ABC Nursing Home is: $700,000
$700,000 / $16,304.35 = 42.93, which when rounded up equals a DSO of 43.
In this case, collections for ABC Nursing Home take an average of 42 days. That said, is this good or bad? Industry standards are 40-45 days, depending on how aggressive your collection goals are, and efficient you want your business office to be. It should also be adjusted based on payer mix and billing timeframes for those payers.
A DSO of less than 40-45 days is the desired standard for a skilled nursing facility (SNF). The DSO can be impacted by several factors. They include payer mix, a poor revenue cycle process, a lack of staff, technical knowledge or skill and more. For example, if a facility’s census is primarily private pay, billing should be completed on a pre-bill basis, and the DSO goal would be closer to 20.
A DSO above 40-45 days for a SNF may be an indication that the facility is having a problem with collection of receivables. Each payer has its own average of payment turnaround, and the business office should know what those are. Some fall within 7-14 days while others push the 30-45-day mark. Additionally, Medicaid pendings and payment plans can drag balances out for several months, which will skew your DSO number up.
The DSO calculation gives management the opportunity to take a deeper look into process. Are claims being submitted to and processed for payment in a timely manner? Is there a Triple Check process in place for review of claims prior to submission to payers to help assess any risk for denial or rejection? Is the amount of receivables in the 120-day and above category and beyond less than 10% of gross revenue? Is there a collection process in place for private pay accounts that will escalate any situations of non-payment after 30 days?
Analyzing DSO by Payer – A Key But Often-Overlooked Strategy for Leveraging DSO
While DSO by itself is a useful metric, we at Richter recommend taking it a step further and completing one or more DSO analyses by payer. By doing so, you’re taking into effect the payer’s billing cycle, so you’ll be able to spot precisely where issues may exist on a granular level, rather than by overall DSO. Additionally, if your DSO resides outside the desired outcome, breaking it down by payer can help you pinpoint which payer is adversely affecting it.
Additional KPIs Complement DSO and Drive Intelligent Revenue Cycle Decision Making for LTPACs
The DSO by itself will not give you all the answers you need to fully analyze your revenue cycle; but it is an ideal and quick tool that can help you begin to first assess where your receivables are at. Analyzing DSO by payer can then enable you to drill down even further and to better inform decision making. For even deeper insights that can help you optimize revenue cycle, consider adopting the following additional KPIs:
Cash collection as a percentage of revenue. This KPI helps you understand how well your revenue cycle takes revenue and converts it into cash. By examining the full percentage of revenue collected – and also looking at specific payers to identify delays – you can better understand the source or sources of issues and take remedial steps to address them. Ideally, you want your percentage of cash collected every month to be above 100%. To calculate cash collection as a percentage of revenue, divide total resident service cash collected by the average monthly net resident service revenue.
Percentage of AR over 90 days. Here, your target should be 15% overall (with most of that AR in the more recent aging buckets). Generally speaking, the further you get from 90 days, the less likely you’ll be able to collect.
Denials write-offs as a percentage of net patient revenue. This KPI lets you know the final disposition of lost reimbursement where all efforts of appeal have been exhausted, or where the provider chooses to write off the expected payment amount. There are numerous reasons why payers don’t pay their obligations; yet, if you’re getting lots of insurance denials – particularly from one or more payers – this KPI can help you determine whether you’re billing incorrectly, or whether the payer is not paying correctly. To determine this metric, divide net dollars written off as denials by the average monthly net patient service revenue.*
Bad debt as a percentage of revenue. This includes the total bad debt deduction as shown on the income statement for the reporting month—not the amount written off from AR. Bad debt as a percentage of revenue is a good trending indicator of the effectiveness of collection efforts. To determine the rate, divide total bad debt by the gross revenue.
Service authorization rate – inpatient or outpatient. This KPI measures what is actually authorized versus the total population that requires authorization. Again, it’s helpful in determining overall revenue cycle process efficiency and effectiveness. To arrive at the rate, divide the number of claim denials for missing or invalid authorizations by the total number of claims.
The key to successful revenue cycle management is process. Collection of revenue is dependent on factors such as having adequate staff with strong technical skills, policies and procedures, an optimized EHR (and utilization of its work flow) and integrations that support the revenue cycle process. Calculation of the DSO will provide management with an indicator of the AR performance for the organization. When combined with the systematic use of additional KPIs outlined above, it will give your facility deep insight on revenue cycle management and help you collect more money more efficiently over time.
Learn More About Richter’s Outsourced Revenue Cycle Management Services
Do you have questions about days sales outstanding, other relevant KPIs or other revenue cycle management challenges? Learn more about Richter’s outsourced revenue cycle management services by contacting us here, or call 866-806-0799 to schedule a free consultation.