Understanding Collection Rates

Question: I have been asked to help clean up and organize our business office. 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. That seems impossible. Where do I start?

Answer: Measure gross collection rate simply by dividing your collections by your charges. I'd suggest using annual data - from this date last year forward. Your outcome will be very dependent on your fee schedule. For example, if you are charging less than or close to your allowables, your collection rate will be close to 100 percent. If you charge more than your allowables - as most practices do - your collection rate will be closer to 40 percent or 50 percent.

According to MGMA data, cardiology practices had median gross collection rates of 44.6 percent in 2003.

It is more telling to measure net collections. Calculate an adjusted or net collections ratio by dividing total collections by net charges. Net charges are payments you agreed to accept from payers for your services - in other words, your allowables.

To put it another way, Adjusted Collections = Collectable Revenue (exclusive of contractual and noncontractual adjustments) divided by Net Charges (allowables).

Because you must measure this retroactively, and because not everyone will pay according to the same schedule, you may end up with an adjusted collections ratio greater than 100 percent. In the period you are measuring, you may have received payment for claims sent during the previous period.

According to MGMA data, cardiology practices had median net or adjusted collection rates of 96.61 percent in 2003. You might find the calculator on our web site (in the Tools section) handy.