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Truth Behind A/R Days: Why It's the Most Important ASC Business Statistic and Why Most ASCs Have it Wrong

Accounts receivable is easily the most misquoted ASC statistic, says Joe Zasa, co-founder and managing partner of ASD Management, and this is very bad news for ASCs as A/R days is also the most important business statistic.

A/R days, Mr. Zasa says, will tell you if your ASC is collecting properly, billing properly, coding properly, collecting co-pays and deductibles in a timely manner, billing in a timely manner and working collections on the back-end properly and doing effective follow-ups on insurance denials.

"The reason this statistic is so important is because it is the barometer for the business office," he says. "It is the best scorecard and measuring stick for your business office, bar none. All of the processes in the business office point back to this number," which is why it is critical that ASCs accurately determine this figure.

Here are several reasons why ASCs are challenged with doing just that:

1. It requires very good financial information to calculate, Mr. Zasa says. "Specifically, it requires accrual accounting," he says. "In order to get a good A/R number, that's a function of loading the contracts of the facility into the MIS, creating a reserve for out-of-network and creating a reasonable bad debt expense based on historical [figures]."

2. The figure is sometimes misquoted because administrators don't understand what the number is or they're coming up with unreasonable write-offs to pad the number and make it look lower, Mr. Zasa says. "The statistic can be manipulated," he says. "An administrator can do so by writing everything off after 90 days or writing off denials. You don't want to write-off anything after 90 days. You want to create a reasonable reserve broken out by aging of the A/R. This can be tested against historical averages to obtain a good estimate. For example, the actual amounts collected over 90 days may be 30 percent; thus, a reserve account should be set up to account for this."

3. ASCs must manually calculate this figure as MIS systems typically do not do so correctly, he says.

Consistent A/R formula

Calculating the correct A/R days figure requires a consistent formula, Mr. Zasa says. Here is one such formula Mr. Zasa suggests:

The formula is a fraction. The numerator is net A/R. The denominator is average daily net revenue. Average daily net revenue is calculated by taking the net revenue for the last two months and dividing by the number of days in those two months.

For example, an ASC's A/R for September is $300,000, Aug. revenue is $200,000 and Sept. revenue is $200,000. The formula would be:

$300,000 / ($200,000 + $200,000)/61 = ~45.8 A/R days

What should A/R be?

Mr. Zasa believes most ASC A/R days are 56 or higher, and not the typically quoted average of 45 days. His centers average approximately 38 days but 45 days in A/R is what a typical center should target, he says. If an ASC sees primarily Medicare patients, A/R should be far lower than that; the same rule applies if it's a cosmetic/plastic surgery facility where most of the patients are self-pay, he says. If it's an ASC that handles a lot of worker's compensation claims with complicated denials to work through and if the ASC handles "letter of protection cases," it's probably going to be slightly higher than that but should still not be in excess of 50 days, Mr. Zasa says.

Four steps to determine your true A/R days

Mr. Zasa says ASCs should take these four steps to determine their actual A/R days.

1. Load your contracts.

2. Establish a bad debt reserve that's reasonable and based on historical figures.

3. Calculate A/R on your financial statements every month. Even if you're on a cash accounting, you can go to a modified cash basis and have A/R on your balance sheet, he says.

4. Once you have two months of data, plug the figures into the formula provided earlier.

Learn more about ASD Management.

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