In this post, we will take a more in-depth look at the net collection rate (NCR) metric and see why practice managers need to add this KPI to their regular reporting regimen.
Defining the Net Collection Rate
The net collection rate (AKA net collection ratio) measures how effective your practice is at collecting the “collectible” portion of the claim. The collectible portion is basically your gross charges less the practice’s negotiated, contractual write-offs. In other words, it’s the amount the insurance company allows for the claim, according to your practice’s contracts. This collectible portion can be referred to as net charges.
Net Charges = Gross Charges – Contractual Write-offs
We now need to determine what percentage of the net charges is collected to come up with the net collection rate. Net charges is the denominator of the NCR formula and net payments, or net collected, is the numerator. Keep in mind that the net collected should include patient and insurance payments, refunds, and any other non-contractual write-offs (e.g., timely filing write-offs, courtesy write-offs, bad debt, etc.).
Net Collections = Total Payments – Patient Refunds – Contractual Write-offs
Thus, the NCR can be boiled down to the following formula.
Net Collection Rate = Net Collections / Net Charges
Evaluating the Net Collection Rate
Unlike the gross collection rate, the net collection rate can be compared across practices. After you remove contractual write-offs from the equation, you are focusing solely on the portion that is collectible. Ideally, the ratio would be 1.0 (or 100%), but we all know that bad debt is inevitable. There are a couple of key points to consider when evaluating your practice’s NCR.
Charge-Based Reporting
It’s important to remember that collection rates are charge-based metrics. For example, if you want to evaluate your NCR for charges generated in the 1st quarter of 2022, make sure you only look at payments, adjustments, and refunds that are associated with those specific charges. In other words, the transactions need to tie back to the period that is being evaluated.
Collection Ratios and Timing
Another key consideration is the impact of time on a practice’s NCR. If you look at your collection rate one month after the claims have been billed, the rate will be much lower than if you evaluated the rate after 6 months. Obviously, the more time you allow to collect on a particular subset of charges, the higher the collection rate will be (this is true up to a certain point). For this reason, it’s helpful to look at your collection rates for a subset of charges at various points in time – such as 3 months, 6 months, 9 months, or even 12 months out.
Assessing the Impact of Improving the NCR
So now that we have a good idea of what the NCR is, let’s look at how it can impact your practice’s bottom line.
Let’s assume that a practice averages $1.5M in gross charges each month. After allowing for contractual write-offs, the monthly net charges are $975,000. Let’s also assume that the practice’s current NCR after 9 months is 97%. Therefore, the total net collections is $945,750.
$975,000 (Net Charges) X 97% (NCR) = $945,750 (Net Collections)
As I mentioned previously, every practice’s NCR would be 100% in a perfect world. However, we know that there will inevitably be some write-offs that the practice has to accept. Now let’s see what the impact would be if the practice could increase the NCR by just 1%, up to 98%.
Current Net Collections with NCR of 97%: $945,750 (97% x $975,000)
Future Net Collections with NCR of 98%: $955,500 (98% x $975,000)
Difference: $9,750 per month
As you can see, the practice earns an additional $9,759 each month ($117,000 a year) by increasing the NCR by just 1%. This is a significant increase in revenue.
Increasing the NCR may be easier said than done. However, it’s well worth the effort. One place to start is by assessing your time-of-service collections – which includes copays, deductibles, and outstanding balances. We won’t dive into that topic right now. However, I’ve presented and posted on this topic in the past. Check out the posts here, here and here.
At my practice, we aim to have a 98% NCR at 6 months, and ultimately get our rates close to 99% after that. The key is to trend this data so you can monitor your practice’s performance over time and see if the changes you make to your revenue cycle processes are beneficial.
Another important thing about the NCR is that, unlike the gross collection rate (GCR), the NCR can be compared across other practices. Once you take the contractual allowances out of the equation, you are focusing on the collectible portion and how well your team is at collecting that portion.
Capturing and Tracking the Net Collection Rate
Now that we understand how to calculate the NCR, let’s look at how to track them. Again, the NCR is charge-based, so you are looking at transactions (i.e., payments, refunds, contractual adjustments, and non-contractual adjustments) that are directly tied to the charges you are evaluating. Running this report from your PM system can be cumbersome and may involve running multiple reports. For instance, you would likely have to run the repot multiple times in order to evaluate the NCR over different timeframes (e.g., 3 months, 6 months, or 9 months out). Furthermore, you will have to rerun the report(s) every time you want to see the data from a different perspective – such as by provider, location, or payer.
Using a business intelligence tool like Microsoft Power BI or Microsoft Excel with PowerPivot, you can create NCR reports and dashboards. These tools allow you to easily view the data from various perspectives (payer, provider, location, etc.). More importantly, you can build calculated fields that contain the NCR logic so that they can be used like any other fields. For example, you could build a net collection rate measure for 3 months, 6 months, or 9 months.
The following examples show how the NCR can be tracked using Microsoft PowerBI. The same reports could be created in Excel as well.
This first screenshot shows a trend of the NCR over each quarter. In this example, we can compare the NCR at 3 months out, 6 months out, and 9 months out. Remember, the logic for the NCR has been programmed into the measures so that you can easily move the measure around. As you can see, it’s very easy to filter by month/year, payer, financial class, location, etc. You can even look at the collection rates by department.
The next screenshot shows the NCR in the form of a pivot table. The NCR is tracked by financial class, payer, and even department. These pivot tables can also be designed so that you can drill down into them. You can drill down to the encounter level or even the CPT code level.
Once the data is flowing into your BI system, you can interact with it in so many different ways. The best part is that you simply just need to refresh your data each month to get updated numbers. This is 1000 times better than using your PM system.
Feel free to email me at medicalpracticeintel@outlook.com if you have any questions, comments, or suggestions. Also, don’t forget to check out some of my other posts at www.medicalpracticeintel.com