January 25, 2016
At PMG, we encourage our community health center (CHC) clients to familiarize themselves with their financial numbers and to utilize the data reports we provide in order to build a strong financial future for their center. Collection rates are a reoccurring topic and without a doubt, collections are important to CHCs. Collections mean money, and as we all know, more money means more mission. However, there is a very important distinction between GROSS collections and NET collections. All too often we find these terms tossed about without explanation or differentiation between the two. Today we will explore why net collection is king and gross collections are, well, grossly unnecessary (pun definitely intended).
Why Gross Collection Rates Just Don’t Matter
We’ve received our share of calls from CHC executives worried about their gross collection rates. Often, they have just seen a report showing that their gross collection rates are down. And that is bad right? We always want collection rates to go up, right? Wrong! When it comes to gross collection percentages we say just ignore it (gasp). That’s right, we said ignore it and here is why…
CHCs are NEVER paid what they charge, and if you are, you aren’t charging enough. The rates of reimbursement from payers vary so widely that clinics must raise their fees above the highest paying reimbursement in order to maximize collections. Otherwise, money is being left on the table. A payer isn’t going to give any more than you ask for or more than they allow. The gross collection rate is really quite meaningless because it has little to do with what the actual payments are and more to do with the ratio between your charge amount and the payer’s allowable rates. A higher gross collection rate simply means that a clinic’s fees are close to the payer rates.
Let’s look at the numbers. Simply put, gross collection rate is the total payments received by your CHC over a specific period divided by your total charges without write-offs. Here is an example, if you charge $100 for services provided and you receive a payment of $65, you have a 65 percent gross collection rate. What?!? How will your center survive with such an abysmal number? Well if you know that the payer’s rate is set at $65 and you only charge $65, theoretically you just achieved a gross collection rate of 100%. Are you making more money? Nope. So does gross collection rate matter? Again, the answer is nope. What really matters is what percentage of what you are owed have you collected.
Keep Your Eye on Net Collection Rates
Net collection rates, also known as the adjusted collection ratios, indicate effectiveness in collecting the money you are allowed to collect. The calculation for net collection rate is total payments for a period divided by the total charges for that same period; minus write-offs (contractual allowances less refunds/ over payments). For example, if you received $600,000 in total payments on charges of $1,000,000 and had write-offs in the amount of $300,000, your net collection rate is 86 percent.
Net collection rates should be between 90 and 100 percent after write-offs are taken. If net collection rates are lower than this then you should consider an audit of billing practices. Know your payer mix and obtain current copies of fee schedules. Of course this can be a lot of work but it is worth it if you want a thorough evaluation and to ensure that you are collecting money earned.