Why Payer Mix AR Performance Targets Matter

Dan Hobbs
Senior Consultant, Revenue Cycle
Healthcare professional reviewing financial operations

Hospital margins rely on accounts receivables (AR) resolution. Without it or if it even slows down, hospitals and health systems cannot operate efficiently. Because every hospital relies on fast turnaround of the revenue gained from charging patients for service, it’s vital that it knows its payer mix AR performance targets.

A common question asked among hospital leaders is: How are your days performing? It’s clear that a key measurement in determining how well a hospital is performing depends on its gross AR days outstanding. While AR days outstanding are facility-specific, it is still the life blood to each hospital. So, how can hospital leaders discover their hospital’s payer mix AR performance targets?

How to Determine Your Payer Mix AR Performance Targets

Before 2009, there wasn’t a data-driven way for hospitals to determine what their target AR days should be. It was then that QHR’s Dan Hobbs, Sr. Consultant, Revenue Cycle, designed the AR Days Target Calculation Tool to help acute care facilities determine their days.

If hospital leaders would like to calculate their AR days target based on revenue, Dan recommends doing the following exercise within an Excel spreadsheet. It will determine a potential target in a best-case scenario and help them discover the gap between it and their actual gross AR days outstanding. Improving the gap is critical to every hospital or health system’s efficiency.

First, hospital leaders must identify the five major groups: Medicare (traditional Medicare only), Medicaid (traditional Medicaid only), Managed Care (BC, Medicare and Medicaid replacement plans, contracts, etc.), commercial (non-governmental, non-contract) and self-pay. Each group will have a specific service-to-pay timeline with Medicaid being the only exception for varying days because it can differ from state-to-state.

Managed Care service-to-pay days depend on the hospital contracts and can range from 30 to 45 days. Commercial is governed by state prompt payment rules, since there isn’t a federal rule. For self-pay, the service-to-pay timeline is based on the assumption it can take 120 days to resolve an account and a small number of accounts will be set to some reasonable payment plans over time. The self-pay payer mix can depend on whether the state chose to expand Medicaid under the Affordable Care Act (ACA). States have a reduction in self pay if Medicaid was expanded.

The suggested respective timelines are the following:

Next, hospital leaders can go ahead and enter their payer mix, ensuring the five percentages total up to 100% of that last 12 months gross revenue. Payer mix is calculated from the last 12 months of gross revenue and can be categorized to the best possible pay time. The distribution will make up Payer Mix 1-5 groups.

Then, they’ll want to multiply the service-to-pay number by the payer mix percentage to reach their factor. Each factor, or weight, will vary greatly based on the two numbers used for multiplication. Finally, add all the factor numbers together to discover the best possible gross AR days target.

If their revenue report does not easily roll revenue into the five described Payer Categories, they can use the payer grouping example below.

Disclaimer: Determining payer mix AR performance targets with this exercise was designed for acute care facilities. It was not designed for physician practices or sub-acute facilities.

What Your Gross AR Days Target Means for Your Organization

Every acute care facility is different and performance targets are specific to them. Although there isn’t a true standard of what the best possible gross AR days should appear for all hospitals, the national average is less than 50 days while 70 days or more means a hospital isn’t performing well.

No matter a facility’s size or location, the best practices to achieve good AR performance remain the same because payer mix is the primary driver of the best possible gross AR days target.

Once an acute care facility knows its Payer Mix, it can follow these best practices to close the gap between current AR performance and the best practice target:

  1. It can determine its target days.
  2. It can know where to deploy technical resources.
  3. It can know where to deploy staff resources.
  4. It can follow up on payment activity depending on the group.

It’s true that the quicker the service-to-pay timeline is, the more stable a hospital can be through favorable cash flow. Many times, before hospital leaders do this exercise, they don’t realize there’s a gap between their best possible gross AR days compared to their actual AR days outstanding. Once they do, they can decide what to do to close the gap.

For example, hospitals can typically get a claim to a payer within five days of service. But, if it takes 20 days to get it out, the hospital is already behind 15 days. By discovering that gap, they can now deploy more staff or technology to get claims out sooner and reduce their gross AR days outstanding.

How QHR Can Help

The question, “How are your days performing?” shouldn’t worry any hospital leader. Even though it can be overwhelming for hospitals and health systems to try and reduce their gross AR days outstanding, it is possible.

At QHR, we’re committed to working with facilities to help them develop their own targets and gain even greater hospital efficiency. If you’re a hospital leader and would like to learn more about calculating and reaching your best possible gross AR days target, contact Dan Hobbs, Sr. Consultant, Revenue Cycle, at today. And, if you’d like to learn more about our Revenue Cycle Solutions, click here.