There is more than evaluating cash flow to assess the financial health of any physician’s practice. However, cash flow is just one factor. You don’t have to be a finance expert to understand the other important metrics like Gross Collection Rate (GCR) and Net Collection Rate (NCR) that should be calculated and reviewed when evaluating the revenue cycle.
It is widely observed that the gross collection and net collection rates tend to create a lot of confusion when it comes to the calculation of a practice’s income. Hence this article is dedicated to understanding these metrics and their importance for your practice.
Gross collection rate
The gross collection is the provider’s gross income or gross profit margin, and it is a measure of a firm’s profitability. The gross income metric is comprised of the direct cost of producing or providing goods and services however it does not include costs related to running an overall business, selling activities, administration, taxes.
Let’s look at an example, if you charge $90 for services provided and you receive a payment of $55, you have a 62 percent gross collection rate.
Now you are amazed by thinking how your center will survive with such an abysmal number. Well, if you know that the payer’s rate is set at $55 and you only charge $55, theoretically you just achieved a gross collection rate of 100%.
Gross Collections Ratio = Total Collections / Total Gross Charges
So, you are neither making more money nor gross collection rate matter but then what matters is what percentage of what you are owed have you collected.
Net collection rate
Net collection rates indicate effectiveness in collecting the money you are allowed to collect. You can calculate the net collection rate by dividing total payments for a period by the total charges for that same period minus write-offs (contractual allowances, fewer refunds/ overpayments).
For example, if you received $600,000 in total payments on charges of $1,000,000 and had write-offs for $300,000, your net collection rate is 86 percent.
Net Collection Ratio = Total Collections / Total Gross Charges
Now you are asking “how should one decide to audit the bill based on net collection rate?”, Yes. When your net collection rates are between 90 and 100 percent after write-offs are taken, you don’t need an audit while lower than this, you should consider an audit of billing practices.
Let’s look at NCR grades below:
Interpret your net collection rate based on the following:
- More than 95% = You are on the right track and keep doing what you’re doing.
- 90% – 94% = You need to improve though things are going well.
- 89% or lower = You should seek helps as reimbursements are being left behind.
Know your payer mix and obtain current copies of fee schedules which is a tedious task but it is worth thorough evaluation and ensuring that you are collecting money earned.
Measure your performance
You should be consistent for reporting over a year like consider using a rolling 12-month schedule to calculate your net collection rate.
As with all billing indicators, performance will be influenced by payer mix and specialty. The level of automation in your practice’s billing and collections process also plays a factor.
Now we will look for Gross Collection vs. Net Collection in Medical Billing as many times a provider worried about drop-in gross collections rates however they should not. Why? let’s understand below.
Gross Collection vs. Net Collection
The net collection rate gives a better insight as compared with the gross collection rate to identify the actual status of a provider’s revenue cycle because the gross collection rate does not deduct write-offs.
If you want to get real insights into your practice’s actual income you need to eliminate write-offs, refunds, contractual/non-contractual amounts from the calculation.
Moreover, the net collection enables you to reveal the payment that your practice is collecting from the payer while the gross collection rate only shows what your practice can collect.
Now you have more clarity about the net and gross collection rate and which metrics you need to focus on for your practice. If you are looking to gain more insight, you can get in touch with us.