Our cardiology practice used an outside billing company that was not providing good business support. To start, I need to calculate the gross and net collection rate of our receivables. Using the most recent A/R reports, what is the formula? The billing company reports indicate a 98 percent rate.
by Codapedia
November 19th, 2015
November 19th, 2015
By: Codapedia Editor (Oct/15/2014)
The net collection ratio is calculated this way: Cash collections divided by net charges. Net charges are the difference between gross charges and required government and third party adjustments. Use gross charges, insurance adjustments and cash collections for the same time period.
Example: Gross charges = $3,740,318; Cash collections = $2,070,275; Insurance Adjustments = 1,588,554
Net Collections = Gross charges-Adjustments 3,740,318-1,588,544=2,151,764.
Net Collections is what you could have collected after insurance adjustments.
Adjusted Collection Ratio: 2,070,275/2,151,764=.96
This practice collected 96 cents of every dollar that they could have collected after insurance write offs.
From gross charges, subtract only your mandated third party adjustments. Include in these adjustments only those write-offs that you had to take because of your contracts with either the government or other third parties. This would include Medicare and Medicaid write-offs and commercial write-offs, which you were required to take because you accepted the plans’ fee schedule or rules. It would not include write-offs for bad debt, charity care, eligibility or registration errors, coding errors, or late filing. It is important that only these mandated adjustments are included in the calculation.
Subtract the mandated adjustments from gross charges and that equals net collections. The net collection ratio equals cash divided by net collection. A high percentage such as 95% or 98% means that the practices is collecting 95% of all the charges which were allowable to them to collect after the adjustments that they were mandated to take by their third party contract.
The net collection ratio varies by specialty. Practices that have a high net collections tend to be stable practices with a low percentage of new patients and tend to be the medical specialties where patients assume they will come back to see the physician year after year. Practices with a lower net collections ratio might include practices with a high transient population, some surgical specialties where the patient feels they will never have to see that surgeon again, and practices with a high percentage of new patient visits. It is critical for the practice to monitor this ratio monthly and track it over time. Both the Medical Group Management Association (MGMA) and Practice Support Resources have normative data by specialty.
References:
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Questions?
AAFP members can ask a question at the Practice Management Help Desk.
In just six minutes, you can learn how to calculate your practice’s net adjusted collection rate. After watching this presentation, you will know how to:
- Obtain a better understanding of the net adjusted collection rate and why it's important for your practice.
- Learn how to calculate the net adjusted collection rate.
- Discover problems to avoid, such as including appropriate write-offs in the calculation.
The adjusted collection rate represents the percentage of reimbursement collected from the total amount allowed based on contractual agreements and other payments, i.e., what you collected versus what you could have/should have collected. This metric shows how much revenue is lost due to factors in the revenue cycle such as uncollectible bad debt, untimely filing, and other noncontractual adjustments.
Best Practice Tips
- The adjusted collection rate should be 95%, at minimum; the average collection rate is 95% to 99%. The highest performers achieve a minimum of 99%.
- Use a 12-month time frame when calculating the adjusted collection rate.
- Keep fee schedules and reimbursement schedules on hand to get an accurate picture of what you should have been paid and avoid inappropriate write-offs.
Calculating Adjusted Collection Rate
To calculate the adjusted collection rate, divide payments (net of credits) by charges (net of approved contractual agreements) for the selected time frame and multiply by 100.
Sample Calculation
![Net Net](/uploads/1/2/5/8/125863499/502447763.jpg)
- (Payments – Credits) / (Charges – Contractual Agreements) x 100
- Total payments: $500,000
- Refunds/credits: $14,000
- Total charges: $850,000
- Total write-offs: $350,000
- ($500,000 – $14,000) / ($850,000 – $350,000)
- $486,000 / $500,000
- 0.972 x 100
- Adjusted collection rate: 97.2%
Other Considerations
Inappropriate write-offs.
One of the most common mistakes when posting payments is applying inappropriate adjustments to charges.
One of the most common mistakes when posting payments is applying inappropriate adjustments to charges.
- For example, failing to distinguish between noncontractual adjustments and contractual adjustments results in a misleading view of how well your practice collects the money it has earned.
- Categorizing noncontractual adjustments (e.g., “untimely claims filing” or “failure to obtain prior authorizations,”) will help reveal sources of errors and identify opportunities to improve revenue cycle performance.
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