Why Net Collection Rate Is Such An Important Billing Metric

by  Find-A-Code™
Jun 21st, 2023

Much of what gets talked about in the medical coding and billing field has to do with code sets, reducing billing errors, and so forth. Things like CPT codes and ICD-10 vs. ICD-11 are discussed in the deepest possible detail. Yet we don't hear a lot about topics like net collection rate.

Speaking of net collection rate, it is a critically important medical billing metric. For all intents and purposes, it encapsulates how a healthcare facility is performing from a revenue vs. profit standpoint. A facility that does not track its net collection rate has no basis on which to determine whether the bottom line is healthy.

Not the Gross Collection Rate

There are different types of collection rate calculations healthcare organizations deal with. Net collection rate is one of them, gross collection rate is another. Note that these two metrics are different. Do not confuse them.

Gross collection rate is a representation of how much a facility collects on a given bill as compared to the cost of providing the services rendered. It is similar to margin in a retail setting. If a $1,000 bill covers services that cost $500 to provide, the gross collection rate is 50%.

Net collection rate has less to do with margins and more to do with how successful collections actually are. The simplest way to understand net collection rate is to compare collections against charges. If a facility receives $1,000 on a claim but only realizes $900 after write-offs, discounts, etc., the net collection rate is 90%.

What Constitutes a Good Rate

Ideally, the healthcare facility would want a 100% net collection rate. But that is neither reasonable nor possible. Write-offs and other charges against medical claims are part and parcel with the system. Clean claims (those which pay at 100%) are the rare exception to the rule.

A net collection rate of 96% or better is what most billing department shoot for. It is considered the industry ideal. If your facility is achieving such a high rate, your coders and billers are doing everything right. They are on top of their game. Unfortunately, 96% isn't the average. A typical healthcare facility in U.S. sees a rate of anywhere between 75% and 85%.

If 96% is the ideal and 85% is the average, there is a lot of work to be done. This goes back to the actual practice of coding and billing along with policies that govern how the billing department does what it does.

Lower Rates Equal Losses

The most important consideration here is a bottom-line consideration. Lower net collection rates equal financial losses. In other words, an organization is earning less money the lower its net collection rate falls. Think about it in terms of your own paycheck. If you suddenly found yourself earning 85% of what you are supposed to earn, you would be alarmed. You would figure out what the problem is and do everything you can to fix it.

This is where the medical billing rubber meets the road. CPT and ICD-10 codes are a big part of the equation. Using updated code sets is non-negotiable. Making sure coding and billing staff are fully trained is a no-brainer. But whether all those efforts pay off is reflected in net collection rate.

Net collection rate is one of the most important metrics in medical billing. It is a metric that every healthcare facility should be tracking on a regular basis. Whether it is every 30, 60, or 90 days, the facility has to know its rate to fully understand its profitability.