What is Net Collections
Net collections is a term used in medical accounting to describe the amount of money collected on the agreed-upon fees charged. Net collections are usually lower than net charges (the total amount the provider agrees to accept as payment) and it is certainly lower than gross charges (the provider’s total invoice amounts before insurance adjustments and other adjustments).
BREAKING DOWN Net Collections
The net collections rate is calculated by dividing payments received from insurers and patients by payments agreed-upon with insurers and patients. A medical practice reports its net collections on the income statement along with gross charges, net charges and the gross collection rate.
Many factors affect how much a medical practice actually collects compared to how much it would like to collect in an ideal world. To start with, several factors lower gross collections. For example, insurance companies may not pay the doctor’s full fee; doctors typically agree to limit their fees to scheduled amounts under their agreements with health insurance companies. In addition, some patients will not pay their bills in full or at all, so the practice will never receive the total amounts owed from those patients. Also, a provider’s billing staff might cause the practice to lose money by not filing claims by the deadline, and insurers may deny some claims that aren’t covered.
Suppose a medical practice’s annual invoices totaled $1 million. That sum would represent its gross charges. The amount the practice actually receives after sending the invoices to its patients and their insurance companies might be $800,000; this is the practice’s net collections.
The adjusted (or net) collection rate is a measure of a medical practice’s effectiveness in collecting reimbursement dollars. As an effective benchmark of your practice’s financial health, it represents the percentage of reimbursement achieved out of the reimbursement allowed based on contractual obligations with payers. Practices calculate their net collection rate to see how much revenue is lost due to factors such as uncollectible debt, untimely filing, and other non-contractual adjustments. Along with days in accounts receivable and denial rates, the net collection rate is key to developing a clear understanding of your overall revenue cycle.
Another way medical practices can analyze their performance is to look at their net collections by payer. Typical payers include Medicare, Medicaid, private health insurance and individual patients. If a medical practice saw that its net collections were unacceptably low for one of these categories, it might stop accepting those patients or start requiring those patients to pay up front before seeing a doctor or having any tests or procedures performed.