Medical billing tips for healthcare professionals — by healthcare professionals.
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Before you build a business case for anything, a new hire, a second location, a new service line, three numbers have to be right. Payer mix. Net collection rate. AR days. Most owners have all three. Almost nobody has calculated them correctly in the last two years. This episode is how to fix that, in about twenty minutes, using your own system.
[Payer mix]
The payer mix on your billing dashboard is almost always built on charges, meaning what you billed. What you need is payer mix by collections, meaning what you actually got paid. Those two numbers are often meaningfully different. Pull payments received by payer over the last 12 months, divide each payer by total net collections, and that percentage is your real mix. Twelve months and not three, because open enrollment shifts and Medicaid redeterminations distort any shorter window.
[Net collection rate]
Gross collection rate compares you to your billed charges, a number nobody ever pays. Net collection rate compares what you collected to what you were contractually owed. Net collections divided by gross charges minus contractual adjustments. Discretionary write-offs, bad debt and charity, do not belong in that adjustment figure, because including them overstates the rate. Most well-run practices land between 95% and 98%. Under 90% is a red flag. Above 99% usually means contractual adjustments are being under-written.
[AR days]
AR balance divided by average daily charges over the last 90 days. Lower is generally better, but the blended number hides the story. Split insurance from patient, then look payer by payer. Under 35 days total is healthy. Medicare should sit at 20 to 28. Medicaid at 35 to 60. Patient AR above 40 days means balances are not being collected at the point of service. Any payer trending up for three consecutive months is worth a conversation.
[Why this matters for a business plan]
A 10% shift toward Medicaid lowers your blended rate per visit by $8 to $15 depending on specialty. In a 30,000-visit-per-year practice that is $240,000 to $450,000 of annual revenue difference, and it is completely invisible if you are using charge-based payer mix. A practice modeling at 96% when the verified rate is 92% overstates revenue by four cents on every dollar. On $300,000 a month that is $12,000 a month that does not exist. And a plan built on 30-day AR while the practice actually runs at 52 days has a cash flow gap in the first 60 to 90 days that the plan never accounts for. That gap shows up as a cash crisis, not a revenue problem.
[Three actions this week]
Pull payer mix by collections: 12 months, by payer, as a percentage of net payments
Pull your net collection rate: net collections divided by gross charges minus contractual adjustments, 12 months, run 90 days in arrears
Pull AR days for your top four payers, insurance and patient separately, with a 3-month trend direction on each
If you cannot pull any of these cleanly from your system, that is the first thing to fix, not the business plan. A plan built on numbers you cannot verify is not a plan. It is a guess with formatting. And if you can pull them and the numbers surprise you, that surprise is worth more than any plan you would have built without looking. Take them to your accountant and your billing manager before you build anything else.
[Episode breakdown]
00:00 The three numbers
00:40 Why this matters before you build anything
02:30 Payer mix: what it actually is
05:10 The calculation that matters
06:40 Why 12 months and not 3 or 6
08:20 Net collection rate: the formula
11:00 How to pull it correctly
13:10 What a healthy number looks like
15:00 The number most practices are using is not this
17:00 AR days: insurance versus patient
19:20 What AR days does to a cash flow plan
21:30 What to do before you build anything
23:00 Next week on EP207
Practice Financial Health Dashboard for Physicians
The workbook version of this episode. Enter your payer mix, net collection rate and AR days and see each one against benchmark, in one place.
Alright, so last week we talked about building business cases for practice. Whether that's a new hire, a second location, a new service line, but you need these three numbers to be right in order for that business case to work. Welcome to Nat RevMD, a podcast where we share tips on optimizing medical billing and improving practice efficiency so you can have the business of your dreams. I'm your host, Dr. Heather Signorelli, founder of Nat RevMD. Let's get started. So this week we're going to talk all about three specific numbers that most practices have to some degree, whether you're tracking that monthly or you're looking at that for a portion of the year. But today we're going to talk about specifically how to calculate them correctly so that you can use those numbers appropriately for your business cases. So the first one is payer mix. And the hard part is that payer mix oftentimes within your billing software shows it based on charges, which I think is important from a patient volume perspective. That is, if your charges are set to something that's equal across all CPTs. But and I don't mean equal as in the same rate, I mean equal as in the same percentage above Medicare, for example. But the important part is actually to track uh payer mix by receipts. So payer mix by charges again helps you get an understanding of what's coming in the door from a patient volume perspective, or even looking at visits, like volume of visits per payer, I think is helpful just so you can understand again who's walking in the door. But from a payment perspective, it is really looking at payer mix by receipts. And that allows you to understand, again, your revenue by certain payers. And so if you see that your revenue for Medicaid is, you know, 10%, you know, from a payer mix perspective. But say, you know, six months or a year from now, that's 20% or 30%. You know that your overall receipts per visit is likely going to go down. Again, depends on your payer mix, depends on your specialty. I'm making a very big generalization, but it's important for you to understand that payer mix and the trend of payer mix if you are making big decisions about your practice. So in our dashboards right now, we track both charges and receipts by payer mix on a month-to-month basis. But for these types of situations where you're looking to make a big change in your practice, it's important to pull that at a larger time span so that you can look at that, you know, uh quarter by quarter over the last 12 months, for example. So, how to calculate this? I think that this should be fairly, fairly self-explanatory, but it's obviously going to be payments received by that specific payer in that time frame divided by each payer's total by your total net collection. So again, you're trying to get a percent of those receipts that are are due to that specific payer. Obviously, you want to look at this at a longer period of time just because it, you know, fluctuates month to month. So it's hard to gauge this on a one-month basis. All right, so the second number to go after here is your net collection rate. And this is, you know, can be something that you put on a dashboard. I really urge you not to look at a single month's data point for this. As we all know, charges come in for one month, but receipts are coming in the month after, you know, over that, you know, 30-day period, uh, 60 days this depends on your payer. But really looking at this at a single month snapshot is not going to be very accurate. The there are there are many different ways to look at net collection ratio. But the key here is that you're looking at the receipts coming in while you've taken away the contractual adjustments. So gross collection, right, is is really depending on your payer, how you set your fee schedule. So gross collection, it which compares build charges to what you get paid, but it doesn't take into account contractual adjustments. Whereas a net collection rate actually compares the collections to what you should have collected after after you subtracted contractual adjustments from your charges. And that's really important for you to be able to track. There is a way you can do this that kind of looks at the mature net collection rate. And that's where you look, okay, you go back 90 days and you say, okay, for those dates of service, I want to look at the total payments that were received for those dates of service divided by the charges minus contractual adjustments. And you should be getting something in the 95 to 98% range. And the important part here is also you want to make sure that your team never does an adjustment for something and labels it as a contractual adjustment when really it was an adjustment for another purpose. So that's why it's really important for when you post payments that those are posted correctly so that you can attribute non-contractual adjustments to the right adjustment code so that you have an ability to pull this metric. And again, pulling it for one month's time, you know, at a single snapshot doesn't really tell you much. Pulling for a longer period of time up to that 90-day retroactive period is what allows you to really understand that rate. You could track and trend this for a 12-month period of time and move it month by month, looking at dates of service rates so that you can assess if that is trending differently than it should be from a month prior. So again, how to pull this correctly, you need to go back 90 days to help address any unpaid claims that are still pending because there were recent claims that were submitted. And again, you're taking the sum of the last 12 months net payments, again, in that 90-day rears time period. And then you're gonna divide that by the gross charges minus all contractual right write-offs for that same period of time. And you're not gonna want to include discretionary write-offs, bad debt, charity, because it just overstates the rate. And again, if that rate is lower than you expect, and we'll talk about those benchmarks in a minute, then you can dive into okay, what were the adjustments during that period of time? Did I have timely filing adjustments? Why am I doing that? Is that charts being signed out late? Is that billers submitting things late? Are the billers adjusting things that you're not aware of? We recently just took on a practice and they were not submitting vaccines and certain codes correctly. And then they were just adjusting off the CPT codes without the practice ever knowing. And okay, fine, they probably wasn't, you know, millions of dollars sitting there in adjustments, but it adds up. And for a pediatrics practice, that is not an ideal way to have your practice run. So, really, really critical that your billing team knows to not do any non-contractual adjustments off without your approval or a policy put into place, right? So, say you get denials for your analysis, for example, say you're in OB practice, and because they're bundled, okay, fine, let's have a policy to write those off without your approval every single time. But we've got to come up with a process around those adjustments so that you are not getting write-offs without your approval. If your system cannot separate contractual from discretionary adjustments, that is definitely something you're going to want to address and build out in the future. So most PM softwares have an ability to create whatever adjustment codes you want. Typically in software setups, that is set up, you know, for the most common types of adjustments appropriately. You just want to make sure that that is being used appropriately. It's been built correctly so that you can build those reports. So, what a healthy number looks like, most well-run practices are in that 95 to 98%. Under 90% is going to be a red flag where there's money being left uncollected. Above 99%, it actually may be a situation where you have uh contractual adjustments for many types of claims coming in right at the charge amount, which means that your charges may not be set high enough. We typically run that type of analysis every quarter, every six months, so that we're looking at making sure that your charges are set high enough so that you don't have an EOB coming in with a zero contractual payment. When we take on a new practice, we're typically doing that a little bit more common or a little bit more frequent, I should say, because that enables us to understand are the charges set high enough? We actually just came across a practice, a new practice for us, that their charges were not set high enough for many of their, many of their CPTs. So we're upping their charges so that they get additional revenue coming in because that means that their fee schedule that they're getting from the payer is actually paying them higher than what their charges are set at. And of course, the insurance company is never going to give you more money than what your charges are. Okay, so the third number for everybody to really make sure that you're tracking is AR days. And we track this on a month-to-month basis, even though it's not exactly accurate, because as you guys know, charges come in different than than than when the payments come in, but it's just a an average for us to look at. But the key way to look at this, again, if you're doing a business case, is to look at this over a longer period of time and look at the average days it takes for your AR to pay. So you may get something in the 35 range. Really, if it's going above 40 days, you want to check and see what's going on. The key here, and on our dashboard, we track this both by insurance and patients. So if we have a practice that's struggling with patient AR, those days in AR could go, you know, higher than that. And so then that signals, okay, what are we doing about patient AR? Do we have, are we collecting that up front from patients? Are we getting old balances before patient is seen? Are we calling patients with balances? Are we sending patients to collections? So that's an important piece. And when you look at days in AR, you want to separate these into insurance and to patient so that you can track and understand where your process failure is happening. If you do see an insurance days in AR that's longer than you than you would like, then we've got to look at, okay, is it a specific payer? Do we have an issue going on? Are your billing team, are they not following up on your claims? So for example, we make sure that claims are being touched, you know, every 21 to 30 days. Just depends what's going on. And there are special reports, especially in really good EMRs, where you can pull and see, you know, did we miss a claim? Did something not get touched? You know, again, this is somewhat manual work. Some softwares are better with workflows and work lists than others, but those reports allow you to catch anything that's not been touched. There are also some PM softwares that allow you to pull those reports and actually see the notes. And so you can run through and go, okay, are we seeing the same exact note month after month? Meaning the team's calling the payer, the payer's saying the same exact denial, but then they're not resolving the claim. And so that's a way for us to just double check and make sure that AR is being handled appropriately within our own team. Because again, you have to have multiple checkpoints that for your accounts receivable. So days and AR is a great way for you to pull this number, understand what that number is, then look at insurance and patient, understand where you have a root cause, and then use that information as you think about your business case. Because if you've got a days and AR issue, that just means it takes you longer to get paid. And so if that is trending up, that is going to impact your business case. So, really important for these three numbers to be addressed before you do a business case based on false information. Because the last thing you want to do is take your average patient visit. So I say it's $150 per visit, but you've got a trend up in Medicaid percentage of those patients who are Medicaid. So it's going to drift that down. Or you've got decreasing net collection rate, right? That's going to drift that $150 per visit down. Or you've got an increase in AR days. Again, that's going to decrease your average reimbursement per visit. So really important for you to have these numbers, get them dialed in in terms of understanding if you have a problem. If you do have a problem, how are we going to fix it? The other thing I want to encourage when you're looking at the net collection rate is so say it is verified at 90% and you use those numbers incorrectly and you overstate revenue, that actually can really impact a business case. So for example, if your verified rate is say 92% and you are overstating revenue thinking that it's 96%, you're overestimating revenue by four cents on every dollar collected. So on a $300,000 a month, you know, net collections that, you know, your practice that's bringing that in, that's $12,000 per month in revenue that does not exist. So really, really important that you identify what's going on with that revenue so that you can figure out mechanism by which to bring that number back up, set up a KPI, figure out who's in charge of fixing that process and then getting a plan built around the correct number. So your business plan is correct, but you're also fixing that 4% issue from the get-go. Again, that 95 to 98% is really what is expected. All right. So in summary, the numbers that I want you to go and calculate if you are putting together a business case is that pair mix. We're going to talk about and go look and find your mature net collection rate. Again, I recommend looking at that 90 days in the rears. So it allows you to look at those claims that have truly been closed. And then obviously the AR days. And looking at that over a longer period of time allows you to really understand how these numbers may impact your business case as you're getting maybe prepared to plan something for 2027. All right. In the show notes, we do have some great things coming up. So we have a webinar and we have a revenue diagnostic plan. So lots of things for you guys to check out. So if you haven't already signed up for the webinar, we are doing this really focused on understanding your risk of documentation not meeting the need when there are down coding when down coding is happening from the payers. So go check these out. We look forward to seeing you here next week, and we will talk to you soon. Thanks.
