Net collection rate: how to calculate it and what’s good

What net collection rate is and what’s considered good

Net collection rate, sometimes called adjusted collection rate, is the percentage of collectible revenue a practice actually collects. It leaves out the amounts you were never entitled to, such as contractual write-offs under your payer contracts, and measures how much of the rest you brought in.

A net collection rate of 95 percent or higher is commonly cited as a healthy target, and many well-run practices aim for 97 percent or more. A rate below about 90 percent is usually a sign that collectible money is being lost to denials, aging claims or unpaid patient balances. These are widely used benchmarks rather than fixed rules, so compare your rate against your own history as well.

The net collection rate formula

Net collection rate = payments ÷ (charges − contractual adjustments) × 100

Each part of the formula should cover the same period:

• Payments. Everything collected from payers and patients, net of refunds.
• Charges. Your gross billed charges.
• Contractual adjustments. The difference between your billed charge and the allowed amount under each payer contract. This is money you agreed not to collect when you signed the contract.

The key rule is that only true contractual adjustments come out of the denominator. Write-offs for denials, timely filing, small balances or bad debt are not contractual. They’re losses, and they belong in the calculation as money you didn’t collect.

A worked example

This example uses made-up round numbers to show the math. It doesn’t describe any real practice.

• Charges for the period: $200,000
• Contractual adjustments: $80,000
• Collectible amount: $200,000 − $80,000 = $120,000
• Payments received: $108,000

Net collection rate = $108,000 ÷ $120,000 × 100 = 90 percent.

That means $12,000 of money the practice was entitled to wasn’t collected. Some of it may still arrive. Some of it may have been written off as denials or bad debt. Either way, a 90 percent rate says roughly one dollar in ten of collectible revenue is at risk.

Now suppose the same practice recorded $6,000 of timely filing write-offs as contractual adjustments. The collectible amount would drop to $114,000 and the rate would look like about 94.7 percent, even though nothing improved. That’s why the definition of an adjustment matters more than the formula.

Net collection rate vs gross collection rate

Gross collection rate is payments divided by total charges, with no adjustments taken out. It mostly reflects how your fee schedule compares to what payers allow. If you raise your charges, your gross rate falls even though you collect the same money. That makes it a poor measure of billing performance.

Net collection rate removes the effect of your fee schedule and asks a better question: of the money you were owed, how much did you get? It’s the number to watch when judging your billing team or billing company.

Common mistakes when calculating it

• Counting avoidable write-offs as contractual. Denials, timely filing and bad debt should never reduce the denominator. If they do, the rate hides the problem it’s supposed to show.
• Mixing periods. Payments this month often relate to charges from earlier months. Use a rolling period, such as the last three, six or twelve months, so timing differences even out.
• Measuring too soon. Claims from the last few weeks haven’t had time to pay. Lag the period if you’re measuring recent charges.
• Ignoring underpayments. If a payer pays less than your contracted rate and the difference is posted as a contractual adjustment, the rate looks fine while money is lost. See how to find insurance underpayments.
• Leaving out patient balances. Patient responsibility is collectible. If those balances go unpaid, the rate should show it.

Why a net collection rate falls

A low rate usually comes from a short list of causes:

• Denials that are never appealed, or appealed after the deadline.
• Claims left in A/R until they age past the payer’s filing limit.
• Underpayments accepted without checking against the contract.
• Patient balances that aren’t collected at the visit and later go to bad debt.
• Small balances written off by default instead of by policy.

A breakdown of write-offs by reason usually shows quickly which of these is the biggest leak.

How to improve your net collection rate

1. Audit your adjustment codes. Make sure denial, timely filing and bad debt write-offs use their own codes and aren’t posted as contractual.
2. Work denials to resolution. Every denial should be corrected, appealed or formally closed with a reason. Our guide on reducing claim denials covers the process.
3. Follow up on aging A/R. Set a routine for claims past 30, 60 and 90 days, and see our days in A/R benchmarks for what healthy aging looks like.
4. Check payments against contracts. Load your fee schedules so underpayments are flagged at posting.
5. Collect patient balances up front. Estimate patient responsibility and collect copays and known balances at check-in.
6. Require approval for write-offs. Set a written policy for who can write off what, and review it monthly.

For claims that have already aged, our A/R recovery service works old balances on contingency, so you pay only from what’s recovered.

How to use net collection rate alongside other numbers

Net collection rate is a strong summary, but it moves slowly and it doesn’t tell you why money is missing. Read it with a few other measures:

• Days in A/R shows how fast you’re paid. A good collection rate with rising days in A/R can mean money is coming in late and some of it may stop coming.
• A/R over 90 days shows how much is at risk of aging out. A large share here often predicts a falling collection rate a few months later.
• Denial rate by reason shows which causes are costing the most, so you know where to fix the process.
• Write-offs by reason shows exactly how collectible money was given up, and whether the write-offs were approved.

Our overview of revenue cycle KPIs explains how these measures fit together.

Questions to ask your billing team or company

If someone else handles your billing, ask them to show you how the rate is calculated, not just the result. Useful questions include:

• Which adjustment codes are excluded from the denominator, and which count as losses?
• What period is the rate based on, and is it lagged for recent charges?
• How much was written off last month for denials, timely filing and small balances, and who approved it?
• How are payments checked against contracted rates?

Clear answers are a good sign. Vague ones are worth following up.

See your real net collection rate

If you’ve never checked how adjustments are coded in your system, your reported rate may not be the real one. Our free A/R audit recalculates it from your own data and shows where collectible money is being lost. Request your free A/R audit. You keep the findings whether or not you hire us.