Net Collections

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 almost always lower than gross charges (the provider’s total invoice amounts before insurance and other adjustments).

Understanding Net Collections

The net, or adjusted, collection rate is a measure of a medical practice’s effectiveness in collecting reimbursement dollars. An effective benchmark of financial health, it represents the percentage of reimbursement achieved out of the reimbursement allowed based on contractual obligations with payers.

Many factors affect how much a medical practice actually collects compared to how much it would collect in an ideal world. Issues that weigh on gross collections include insurance companies not paying 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. Furthermore, 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.

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 overall medical practice revenue cycles.

Recording Net Collections

The net collections rate is calculated by dividing payments received from insurers and patients by payments agreed-upon with insurers and patients. To arrive at a percentage value, it's then necessary to multiply that figure by 100.

Suppose a medical practice’s annual invoices, or gross charges, totaled $1 million and the amount the practice actually received after sending the invoices to its patients and their insurance companies—its net collections—came in at $800,000. Divide 800,000 by 1,000,000 and you get 0.8—or a net collection rate of 80%.

Benefits of Net Collections 

Not collecting on money that is owed is a big headache for medical practices and an increasingly common one, too. The profession has to contend with patients paying more for their own care, due in part to a rise in high-deductible plans, and insurers often doing whatever they can to deny claims and save themselves money.

Medical companies are urged to constantly address ways to limit losses and prevent them from happening in the future. In many cases, the best way to spot troubling trends and stamp them out swiftly is to regularly monitor net collections.

One way medical practices can analyze their performance is to break down their net collections by payer—typical delineations include Medicare, Medicaid, private health insurance and individual patients. If a medical practice sees 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 upfront before seeing a doctor or having any tests or procedures performed.