DAYS SALES OUTSTANDING is a simple mathematical calculation that measures the average period of time it takes to turn your average dollar of revenue into cash.

Because DSO can serve as a benchmark for the performance of your billing and accounts receivable functions, it is critical to the long-term health of your home health care business that you know and track changes in your DSO.

But beware: A DSO calculation can also dangerously oversimplify the fairly complex process of revenue recognition and collections.

Let's look at what DSO really measures and how you can use it most successfully.

Putting DSO in Perspective HISTORICALLY, DSOs for home medical equipment companies have hovered in the mid 80s; for home infusion businesses, they've been in the 100s. (See the chart on this page.) However, don't overreact to these industry averages. Forget a specific number-a stable benchmark is often difficult for many companies to meet.

Unfortunately, when companies don't hit the industry standard, they commonly react by trying to collect more money. But just as increased volume doesn't guarantee increased profits, trying to collect more money isn't an adequate response to a cash-flow problem.

Here's the bottom line: DSO reflects overall operational discipline-not just cash collection performance. This means providers that consistently fail to meet their industry benchmarks have one of two problems: One, they manage their businesses fairly well based on the business models they have created, but their expectations of DSO performance are out of whack with those models; or two, they haven't a clue how to manage their businesses. They have a skewed expectation of DSO performance and have created a patchwork quilt of temporary solutions to improve collections.

Each HME and infusion business has unique characteristics that can positively or negatively affect DSO. By not recognizing the process that creates DSO (as well as cash), a company will fail to properly identify these characteristics or to properly diagnose operational problems and come up with a lasting solution. This, in turn, can create an expectation that the DSO should be lower than it really is.

But remember, quick or simple solutions to a DSO problem are rare. Business executives must have a sophisticated understanding of their business models and their operational efficiency before they can have a realistic expectation of what would be an appropriate DSO.

For example, revenue sources heavily influence DSO. So if your business focuses on cash-and-carry (retail) transactions, you will have the "ultimate" DSO-zero. If, on the other hand, you rely on third-party payments from someone with whom you have only a handshake arrangement and someone who never pays the bills, your operation will have the worst-case DSO scenario. In the real world, of course, most HME and infusion providers fall somewhere in the middle.

To help reduce their DSOs, many HME companies have tried to expand their retail business. A word of caution on this strategy: Robbing Peter won't help pay Paul. Many HME markets have a finite amount of retail business. Retail product lines also can conflict with the traditional HME business model of rentals with an emphasis on respiratory. In other words, pushing retail should not and cannot be a strategy for fixing your traditional HME business.

Looking Behind Your DSO ONCE YOU recognize that DSO simply reflects operational discipline, the next obvious step is to ask yourself what operational factors affect DSO performance. This is the critical question if you want to define a sustainable DSO. Let's look at factors that can have the biggest impact on DSO.

* Pricing Methods The more diverse your pricing methods, the higher your DSO will be. Conversely, the more consistent your pricing, the greater the probability of a lower DSO. All too many HME and infusion providers have become victims of widely diverse yet innovative and competitive pricing matrices. But remember, while it's great to be innovative and competitive in your marketplace, your pricing must be compatible with your revenue-processing system. For example, you might rent an item-say a wheelchair-for a bundled fee. But your payer wants claims submitted in unbundled fashion: wheelchair, legrests, armrests, etc.

Whenever negotiating a contract payment arrangement, you must find a balance between the need to innovate because of competitive reasons and the normal processing behaviors of your billing system. The minute there's an imbalance, you will have a problem. And the greater the gap between your pricing/packaging methodologies and your billing methodologies, the more problems you will have. It's your choice.

* Inventory Management You might be an HME provider who has chosen or has been forced to be "all things to all people." The dizzying array of products in your inventory plus the constant demand by customers to add more will create a number of problems, including an unmanageable inventory file in your billing system, constant exceptions to "the rule" on pricing and billing, and gaps in your staff's product and billing knowledge.

In other words, the more you add noncore business or products to a static infrastructure, the higher your DSO will be. To keep it under control, focus on your core business or core product lines-the revenue streams that generate good profit within your existing infrastructure.

* Payer Mix It has been proved consistently that the higher your Medicare payer mix, the lower your DSO will be. Conversely, the higher your managed care and commercial insurance payer mix, the higher your DSO will be.

If this sounds odd, just think about Medicare as a payer. Its rules are essentially defined and published, your claims generally are submitted electronically, and if Medicare fails to meet the expectation it sets for you, you are legally entitled to challenge it. Now compare that with commercial insurance or managed care payers, and you will see why these two payers generate such different DSO numbers.

Careful payer-mix management always includes careful product-line management. However, some providers (particularly home infusion companies) cannot expand their Medicare payer mix because the demand for services always will exceed the current Medicare coverage structure. Still, even these companies can define the administrative and cash-flow efficiencies afforded by some payers and negotiate payment arrangements or contracts that mirror those. The greater your skill at creating a defined, implementable and enforceable contract payer arrangement, the greater the likelihood of a lower DSO.

* Level of Automation This issue not only speaks to companies that do things manually (as opposed to electronically) but also to computerized businesses that use only portions of their software systems. Given that the vast majority of HME and infusion providers have an inventory management/billing system in place, companies that struggle to reach their DSO goals are failing to use the most meaningful aspects of their systems and/or failing to manage their systems' databases. (See the chart on this page.)

Two of the most common unused or underused automation functions are document creation and claims tracking. Many companies fail to use their document creation systems to effectively link transactions to the appropriate type of medical documentation, to print standard types of medical documentation off the system, to track outstanding documentation and to chase down missing documentation. With claims tracking, many companies fail to use their systems (or even to have systems) to track claim denials and trends. This is the ultimate outcome report that tells you why claims are not being paid and, as such, is a crucial diagnostic tool.

* Account Load This operational factor is essentially how you staff your billing department and how you get the greatest return on your investment in that staff. HME companies typically use a 1:500 ratio of billers to patient accounts with open balances. Home infusion companies often use a 1:150 ratio. But a ratio can't stand alone. It must be supported with a clear vision of workload. (See chart on page 78.)

Think of the 80/20 rule: 80 percent of a biller's time is spent working the Aging Report, and 20 percent of a biller's time is spent doing current billing. Companies that struggle to meet DSO goals consistently have an inverted 80/20 rule: The staff is so busy putting out fires and trying to clean up data for routine and current bills that it never gets to the Aging Report.

* Intake There is a direct correlation between the strength of an intake department (and the documentation it generates) and the quality and collection of the claims submitted to payers. The weaker the intake function, the greater the probability of delayed and "dirty" claims being submitted to payers who look for any excuse not to pay them.

Intake is the entry point of your revenue. It is not a function that just evolves. It is a function that needs clear direction and management supervision, which is a byproduct of product-line management, payer-mix management, standard pricing methodologies and automation.

So What Is Sustainable? WOULDN'T IT be great if a simple formula could calculate a sustainable DSO based on certain business practices? Well, don't hold your breath! Determining a sustainable DSO is more art than science. However, it always must start with an awareness of the operational practices unique to your business and how those affect your DSO performance.

If you are trying, for example, to be all things to all people and are dissatisfied with your DSO, you have two choices: Refocus your product and service offering as a core DSO reduction strategy, or maintain your current product/service offering and establish a more reasonable DSO goal, which likely will be higher than the industry average.

Or perhaps you are a hospital-affiliated HME/infusion provider. The hospital might want a DSO of 85 days, but your company might have the following operational characteristics:

* A clinically focused, centralized intake department that thinks of intake as nursing-visit focused;

* A hospital system that uses a hospital-based managed care contract person to market and get managed care contracts without regard to specific contract issues for HME and infusion;

* A history of not investing in the people and/or systems required to effectively manage the revenue-processing function.

A business with these characteristics probably already is struggling with a triple-digit DSO that begins with a "2". Realistically, this business would not be able to achieve a DSO of 85. Of course, it should not have a DSO of 200 either. With the right operational improvements, however, it could achieve a sustainable DSO in the low 100s.

The key to determining your sustainable DSO is understanding the daily business activities that affect when revenue is recognized, how it is recognized and when it is collected. You then must make conscious decisions about how you want those business activities to take place.

Only then can you determine whether the business model you have defined is consistent with your DSO expectations. If it isn't, you have yet another choice: Change your operation-or change your expectations.