Every medical practice needs a continuous income to manage costs and generate revenue, but how you measure how you’re accruing this income can easily get confusing, especially when medical billing isn’t a cut and dry process. Gross collection and net collection have always been a confusing mess, so let’s break it down.
Gross collection is a term that refers to a provider’s gross income or gross profit margin, and is one of, if not, the most simple measure of profitability. While gross income includes the direct cost of providing services, it does not include other costs related to admin, taxes, and other business expenses.
Net collection, also known as net adjusted collection or cash collection, is a term used to describe the amount of money collected on the agreed-upon fees charged. Net collections are typically lower than net charges and virtually always lower than gross charges.
Net charges: the total charge amount the provider agrees to accept.
Gross charges: the total invoice amounts before insurance and other adjustments.
Net collection rate is a measure of a practice’s effectiveness in collecting reimbursement dollars. When you monitor net collection rate, it reveals how much revenue is lost because of revenue cycle factors such as uncollectible bad debt, untimely filing and other non-contractual adjustments, according to the American Academy of Family Physicians.
Gross vs. net collection
Of all the metrics or Key Performance Indicators (KPIs) in medical billing, net collection is considered the best indicator of a practice’s true income because unlike gross collection, net collection offers a better look at the actual status of a provider’s revenue cycle management and is the only way to calculate net income from various sources/payers.
In fact, gross collection does not take into account write-offs, refunds and contractual/non-contractual amounts since gross collection rate can only show what a practice is allowed to collect.
A reasonable revenue cycle can be maintained with a 90% or above net collection rate, though the American Academy of Family Physicians said the minimum should be 95%, with the industry average being 95–99%.
If a practice’s net collection rate is below 90% (or 95% depending on which measurement they’re looking at) after deducting write-offs, consider auditing billing processes.
Calculating gross and net collections
So, how do you calculate gross and net collections rates? It’s actually not as hard as you might think.
The formula is as following:
Gross collection rate = total payments / charges *100% (for a specific time period)
Net collection rate = (payments / (charges – contractual adjustments)) * 100%
The gross collections rate is calculated by dividing total payments by charges, then multiplying by 100 so as to get the percentage total.
The net collections rate is calculated by dividing payments received from insurers and patients by payments agreed-upon with payers, (i.e., the charge prices subtracted by contractual adjustments). Multiply the total by 100 to get the percentage total.
Example from Investopedia:
Suppose a medical practice’s annual invoices, or gross charges, totaled $1 million and the amount the practice actually received after sending the invoices to its patients and their insurance companies—its net collections—came in at $800,000. Divide 800,000 by 1,000,000 and you get 0.8 — or a net collection rate of 80 percent.
How to avoid problems when calculating your net collection rate
Distinguish between non-contractual and contractual adjustments. The number one problem that occurs when calculating net collection rate is including inappropriate write-offs in the calculation, which most commonly occurs when you lump non-contractual and contractual adjustments together. If you distinguish between the two, you won’t mislead others of how your practice collects the money it has earned.
Track non-contractual adjustments based on their reasons, such as untimely claim filing, failure to obtain prior authorization, etc. When you track your adjustment reasons, you can reveal sources of your errors and can help you find opportunities to improve.
Keep fee schedules and reimbursement schedules on hand. You can’t make a large change in your revenue cycle without access to each of your payer’s fee schedules or reimbursement schedules. Without your fee schedules you cannot know if you’re being underpaid and inappropriate write-offs can easily go undetected.
Manage your fee schedules, increase revenue and decrease AR days.
Rivet is a modern revenue cycle product suite that allows you to see the big picture of what’s going on in your practice with payer contracts, fee schedules, denials and underpayments. You can also check eligibility and provide accurate up-front patient cost estimates before services are rendered. The Rivet team will help you aggregate your fee schedules and input your claims data to enable you to increase revenue and decrease AR days.
For more information about the tools Rivet provides, schedule a Rivet demo.