Gross Collection Ratio vs Net Collection Ratio: What's the Difference?

June 3, 2021 by Antonio Arias, MBA, CHBME

Topics: Medical Billing, Practice Management

gross collection ratio

Evaluating your net and gross collection rates is critical to gain a clear view of your medical practice’s overall revenue cycle. These metrics are important to understand how profitable your practice is and to reveal gaps in the path to profitably. You need to monitor these rates regularly and track them over a period of time to identify fluctuations to investigate where and why any problematic changes take place. Keep reading to learn the difference between gross and net collection rates, and how to calculate them for your practice!

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What Is Net Collection Rate?

A practice’s net collection rate is an essential performance metric. It measures how effective the practice is at collecting all legitimate forms of reimbursement for services, which are typically the amount owed after all-payer contract adjustments are made. The net collection rate indicates deficiencies in this process. If a practice is struggling to collect revenue due to bad debt, late filings, coding errors, or claim underpayments, it will have a low net collection rate.

Why Does Your Medical Practice's Net Collection Rate Matter?

A medical practice’s net collection ratio is one of its most significant collections metrics as it provides visibility into what is actually being collected and what your medical practice is actually allowed to collect after factoring in any refunds, write-offs, or any other contractual and non-contractual amounts. As a result, your net collection rate is one of the most important collections metrics as it gives a clear picture of your practice’s benchmark performance. 

Optimizing your net collection rate can indicate areas where your medical practice is losing revenue. This is especially important as many insurance providers are increasing their denial rates and have been more demanding in terms of documentation. If your net collection ratio is indicating your medical practice is underperforming, your practice must investigate what processes need to be optimized for success. The reasons for a major gap between the score you have and the score you want can range from a variety of reasons, but they all have the same outcome: a negative effect on your medical practice’s financial health. 

What's the Difference Between Gross Collection Rate and Net Collection Rate?

When it comes to Medical Billing Metrics or Key Performance Indicators (KPIs) in Medical Billing, the net collection is considered as the best indicator of a practice’s true income. Unlike gross collection, the net collection gives a better insight to identify the actual status of a provider’s revenue cycle. A healthy revenue cycle can be maintained by ensuring 90% or above net collection rate. However, if your practice’s net collection rate is lower than 90% after deducting write-offs, then it is advisable to audit your billing practice.

On the other hand, the gross collection simply refers to a provider’s gross income or gross profit margin and is the most simple measure of the practice’s profitability. While the gross income metric includes the direct cost of producing or providing goods and services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business. Since the gross collection rate does not deduct write-offs, it is considered to be a less effective KPI as compared to the net collection rate because, without eliminating write-offs, refunds, contractual/non-contractual amounts from the calculation, you cannot get an insight into your practice’s actual income.

What Should Your Gross and Net Collection Rates Be?

A 96% net collection rate is considered ideal across the industry. Anything lower than a 95% clean claims ratio means your medical practice is losing revenue, which also indicates your medical practice is wasting further money and time reworking rejected claims. In reality, most medical practices have a rate that varies between 75% and 85%, which means that somewhere around 15–25% of claims submitted each month have to be worked on twice, at minimum. 

Once you determine how your baseline collection rate stacks up to that goal, use information from your medical association to compare it to industry averages. From there, set a collections metric objective based on how much you would like to see it go up and how this could affect your revenue stream.

Calculating net collection ratio

How to Calculate Gross Collection Rate and Net Collection Rate

Both the gross and net collection rates are essential for understanding how your practice is performing; here’s how to calculate these metrics:

Calculating Gross Collection Rate (GCR)

The GCR formula looks like this:

Gross Collection Rate = Total Payments / Charges *100% (for a specific time period)

The gross collection rate only shows what your practice is allowed to collect. For example, you may have charged $200 but you only collected $175 from your insurance payer due to the agreement or contract that you might have signed. Here, the $175 is below the gross rate.

Calculating Net Collection Rate (NCR)

Since net collection rate is directly tied to a practice’s revenue stream, it’s one of the most important performance metrics to monitor. Typically calculated quarterly, the rate represents a snapshot of financial health and efficiency. A low net collection rate should be treated as an urgent priority because it indicates that the practice has a persistent problem when it comes to gathering revenue, which could indicate organizational inefficiency or an issue with patient relations and communication.

Optimizing your net collection rate starts with understanding how to assess your net collection rate. Calculating net collection rate involves several important steps: 

  1. Identify the time period that you want to monitor (e.g., 90 or 120 days). Assess data from an earlier period in which the majority of claims would be closed and cleared; ~6 months back is advisable.
  2. Calculate total payments (from payers and patients) for the designated time period.
  3. Calculate total charges minus approved write-offs (e.g., due to contractual reasons, bad debt, professional courtesy discounts, etc.) for the designated time period.
  4. Divide your calculation in step 2 by your calculation in step 3. Then multiply by 100.

The formula looks like this:

Net Collection Rate = (Payments / (Charges – Contractual Adjustments)) * 100%

Do this consistently (e.g., every 90 days) for a period of at least one year to get the most accurate average rate. 

Best Practices To Improve Your Medical Practice's Net Collection Rate

Your strategy to help improve net collection rates will differ depending on your issues and your goals for improvement. Once you have the basics of improvement covered – by ensuring your front desk staff is on top of co-pays and that your patients understand your payment policies – you can take a more tactical approach. Auditing claims, coordinating more closely with payer reps, and tasking staff with follow-ups can help ensure you collect every single dollar owed and that your net collection rate gets as close to 100% as possible.

Some strategies for improving your net collection rate include:

1. Implementing Front-End Point-of-Service collections

One of the easiest steps to take is to collect 100% of copayments and deductibles from patients at the initial point-of-service. This ensures that no one walks out of the office with an outstanding bill and avoids the resulting hassle of collecting payments afterward, which can be just as inconvenient for the patient as it is for the practice. Setting up appointment reminders that inform patients they must pay for medical services up-front is essential for making this strategy effective.

2. Calculate Your Net Collection Ratio Consistently

For the most accurate net collection rate, your medical practice needs to be calculated regularly. While the net collection rate can be measured monthly, quarterly, semi-annually, or annually, the longer the time frame, the more data you will have to provide an accurate performance assessment of your practice. Calculating net collection rate every 90 days for at least one year will help provide the most accurate average rate. 

3. Partner with a Medical Billing Service

Whatever the causes of a low net collection rate, partnering with a reputable medical billing service is one of the fastest and easiest ways to turn this key revenue metric around. Outsourcing your medical billing process over to a third party also frees up time for office staff to focus on providing the best service and care possible. Instead of spending hours on the phones trying to collect outstanding payments, a medical billing company can focus on expanding the practice’s patient base and improving the practice’s healthcare experience to better retain the patients it already has.

NCG Medical has four decades of experience with handling coding and billing issues for a variety of healthcare practices. We understand that each practice is unique and requires a customized solution that aligns with its long-term goals. That’s why we work closely with our clients to help them set up the medical billing services and solutions that meet their specific needs and allows them to deliver the best care possible. To find out what we can do for your practice, contact our team today for a consultation.

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