What Is It?
DSO stands for Days Sales Outstanding. It is also sometimes referred to as Number of Days in Accounts Receivable (AR). Most importantly, it’s a metric or Key Performance Indicator (KPI) used to track the number of days it takes an organization to receive payment and close a claim.
To calculate a typical Revenue Cycle Management DSO, a common method is to find the Average Daily Revenue for a specific time period and divide by the total outstanding AR at a point in time.
- Step 1: Add the revenue for a three-month period.
- Step 2: Divide the total revenue for those three months by the total number of calendar days. The result is your Average Daily Revenue.
- Step 3: Divide the Average Daily Revenue by the total gross AR balance.
| Month 1 | Month 2 | Month 3 | Totals | |
|---|---|---|---|---|
| Number of Days Each Month | 31 Days | 28 Days | 31 Days | 90 Days |
| Revenue | $29,222,000 | $25,557,000 | $29,277,000 | $84,056,000 |
| Average Daily Revenue | $933,955 | |||
| Gross AR | $49,000,000 |
Days Sales Outstanding
The same formula can be tweaked and applied using various lenses like division, lines of business, individual insurers or payors with a category such as Medicaid Managed Care or Commercial Insurance.
Why Does It Matter?
DSO can shine a light on how efficient or deficient a company is in collecting their accounts receivable balances. Understanding the various payment mechanisms and forecasting any potential delays will better inform strategies that will lead to faster reimbursement and ensure steady cash flow for the services provided in good faith.
Some payors, like Medicare, typically reimburses within 30 days, while others may have a lag of 60 days or more. DSO targets in the healthcare industry vary by service providers, such as, hospitals, nursing facilities, physicians and ambulance or by other factors, payor mix and geographical location. The keys to successful reimbursement are clean claims, dedicated and skilled employees, robust policies and procedures and continuous process improvement.
