Bad Debt and Collections Ratio

April 1, 2006

Should I include bad debt when I calculate and benchmark my net collections ratio? I know the net collections ratio is supposed to tell me if the billing office is collecting everything it can, but should I expect the billing office to collect on bad debt accounts?

Question: Should I include bad debt when I calculate and benchmark my net collections ratio? I know the net collections ratio is supposed to tell me if the billing office is collecting everything it can, but should I expect the billing office to collect on bad debt accounts?

Answer: The key with all benchmarking activities is to create your data exactly the same way the benchmark data were created. For example, the Medical Group Management Association (MGMA) calculates net collections ratios with this formula: Collectable Revenue (exclusive of contractual and non-contractual adjustments) divided by Net Charges (allowables). And, yes, MGMA does consider bad debt part of "collectable revenue."