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How do I calculate days sales outstanding (DSO) in a way that is meaningful in assessing our billing and collections efforts?


It's fairly easy if you use this simplified formula. Calculate your total billed revenue over the previous 12 months minus contractual adjustments (the amount billed over the allowable), including anticipated revenue that is holding for billing, and divide that by 365 to get an average of your daily sales. For example, if the total revenue over the last 12 months is 3.65 million dollars your average daily sales figure would be $10,000 per day.

Now calculate your total outstanding receivables (again minus anticipated contractual adjustments). That would include the total amount of outstanding revenue on your accounts receivable aging reports, plus the dollar amount of anticipated revenue that has not yet dropped to accounts receivable, such as billings that are holding for CMNs or other documentation. For our example, let’s assume the total is $800,000. Now take that number and divide it by your average daily sales. In this example, 800K / 10K = 80 DSO

The current industry average DSO is about 68 days. For companies that focus on respiratory products, a DSO in the low 50's is expected. Complex rehab providers can expect to see a DSO as high as 90 days. Your DSO will vary from industry averages depending on which products you provide, and how many commercial / private insurance payers you contract with. It is a fact of life that commercial insurance payers are slower to pay than entities like Medicare and Medicaid.

A lower DSO usually means you are doing well, but a DSO that exceeds 90 days is generally an indication that you need to review billing and collections processes.

However, keep in mind that measuring DSO in a vacuum can be extremely misleading.  You’ll need to take your company’s accounts receivable adjustment practices into account in order for the data to be meaningful. For instance, a high DSO can be misleading if your company makes it a practice to seldom or never write off old AR that has become uncollectible. On the other hand, if your company tends to give up very quickly on accounts that may be collectible, a low DSO may be more a reflection of your willingness to adjust accounts rather than a measure of how well you collect cash.  

Assuming your company has a logical adjustment process in place, the best use of the DSO calculation most likely lies in trending the results from month to month in order to measure whether billing and collections efforts are improving or falling off pace.


What is the most effective process for making decisions about writing off uncollectible accounts?


The goal of an effective adjustment process is to write off uncollectible accounts receivable so as not to expend further resources on collection efforts for claims where there is no longer hope of successful reimbursement. In addition, writing off dollars that you have determined are uncollectible will make the collections process more streamlined for your billing staff, and result in improved productivity. Last, but not by any means least, an effective adjustment process provides a clearer picture of actual revenue, allowing management to make good business decisions based on accurate income data.

On the other hand your company’s adjustment process should prevent writing off revenue that still has a possibility of being collected simply because the collections process for a particular account has turned difficult and tedious. In other words, an effective adjustment process strikes the correct balance between a reluctance to write off uncollectible claims, and an eagerness to write off claims that still show some promise of being reimbursed.

When reviewing accounts for possible adjustment take the time to ask yourself the following questions about each claim:

  •      Has the company made an uncorrectable error that is preventing the claim from being paid despite several attempts at collection?

  •      Does all available medical necessity documentation fail to demonstrate the medical necessity of the equipment provided to the patient according to the payer’s reimbursement criteria?

  •      Have timely filing deadlines passed while attempting to correct and//or obtain necessary documentation for legitimately denied claims?

If the answer to any of these questions is yes, it’s probably time to give serious consideration to writing off the claim. To further ensure that claims are not written off prematurely think about putting a process in place that provides for supervisory review of all adjustments so that they are seen by at least two sets of knowledgeable eyes before receivables are written off. A second advantage to adding supervisory review to the process is that it will enable management to be aware of the most common causes for adjustments.

To reduce adjustments over the long term, develop “reason coding” for all categories of adjustments. Assign a reason code to each adjustment as it is approved, then aggregate and review the reason code data quarterly. Once you’ve identified the most frequent causes of write-offs you can develop and put processes in place to reduce them.


What kind of features should I look for in an HME software system?


Purchasing HME systems software is very likely to be one of the single biggest investments your company makes during the life of your business. It's certainly a decision that will have a tremendous impact on your business. Therefore, it's not a decision to be made without a substantial investments of your time.

No one size fits all when it comes to HME software. The perfect software for your company will be determined by a number of factors: the size of the company:  future plans / strategies for growth: the primary category / type of products provided: and a host of other factors.

Please see our article for HomeCare Magazine for details on to best evaluate HME software, and which features are a must have depending on the size of your company: Software Rx


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