Other ways to look at net collection percentages
October 1, 1999 2 minutes read
Other ways to look at net collection percentages
Customizing your analysis
Like skinning the proverbial cat, there is also more than one way to calculate how much of your practice’s expected revenue is actually collected, reports Pamela L. Moore, a communications specialist with the Medical Group Management Association (MGMA) in Englewood, CO.
According to Elizabeth Woodcock, a consultant with the MGMA Health Care Consulting Group, the most generally accepted net collection percentage calculation is: Net collection percentage = total fee for service revenue (cash collected) divided by adjusted fee for service charges, or gross charges minus contractual allowances.
While this may be the most common formula used to determine the efficiency of your collection process, others feel it is too limited for their needs. These reservations are based on the fact that the "standard calculation can’t differentiate between collections lost to true bad debt and losses that could be controlled, and it doesn’t work for practices doing accrual-based instead of cash-based accounting," notes Moore.
For instance, while accounting for losses due to managed care contracting adjustments, this formula does not account for collections lost to noncompliance with payer requirements, argues Heather Bossin, executive director of the shared billing and collection service at Washington University in St. Louis.
Under this method, claims that are not paid because a referral was improperly managed or filed late would simply appear as a bad debt, notes Bossin.
"That just hides the fact that some of those losses are, in fact, controllable. As such, the billing service is not responsible for 100% of the net collection percentage," she says.
Dave Gans, director of MGMA’s Survey Operations Department, counters that "since calculations in the MGMA Cost Survey are based on a full year’s amount of revenue, the amount of correctable’ loss should be insignificant."
Another controversy in determining net collection percentage is whether the practice works on a cash or accrual basis, says Moore. Cash accounting records revenue when it is received and expenses when they are paid; accrual accounting records revenue when a service is performed and expenses when they are incurred.
Most experts estimate that 75% to 90% of all practices use the cash accounting method. The ones that use accrual are typically academic practices with large capital expenditures or practices linked through PhyCor or other publicly traded companies in which accrual accounting is the standard used, says MGMA.
Some other practices use a modified accrual method. For these, a typical series of calculations to determine net collection percentage would be: Net collectable charges = last month’s charges minus this month’s contractual adjustments minus this month’s bad debt. Thus, collection ratio = net payments divided by net collectable charges.
The reason for using the one-month lag in calculating net collectable charges is to correct for variations in charges that won’t affect you until about a month later, because this month’s payments generally have more to do with last month’s charges than this month’s charges.
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