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Gross Collection Ratio vs Net Collection Ratio: Understanding These Financial KPIs

Your holistic practice’s success and longevity within your community are predicated upon a streamlined healthcare revenue cycle—part of that comes from understanding a couple of key financial metrics that you can use to evaluate your practice’s current performance! Being able to calculate and track the financial key performance indicators, known as KPIs, of your holistic practice means that you’ll be able to make changes where needed and be better informed of your business’s status.

Two key metrics to track are the gross collection ratio (GCR) and the net collection ratio (NCR); these might sound the same, but they track different aspects of your practice. Both are valuable for you to know and measure because they help fill in the picture of your practice’s financial health!

Keep reading to learn the difference between gross and net collection ratios, plus how to calculate them for yourself.

What Is Your Gross Collection Ratio?

Let’s start with the GCR: the gross collection ratio refers to your practice’s gross income or gross profit; this is the most simple measure of your practice’s profitability. This metric includes the direct cost of producing or providing goods and services but doesn’t include the costs related to running your practice like administrative expenses, taxes, and other potential expenses.

An important note regarding the gross collection ratio is that it doesn’t deduct write-offs, so it’s considered to be a less effective measure of the financial performance of your holistic practice compared to the net collection ratio. Without removing write-offs, refunds, and contractual or non-contractual amounts from the math, you can’t get a comprehensive insight into your practice’s income.

What Is Your Net Collection Ratio?

On the other hand, your practice’s net collection ratio is an essential metric that measures how effectively your practice is at collecting all legitimate forms of revenue. This rate indicates inefficiencies in the process; for example, if a practice is struggling to collect payment due to bad debt, late filings, coding inaccuracies, claim underpayments or some other type of revenue issue, then it will have a low net collection rate.

The ideal net collection rate to strive for is 90% or above since that reflects your practice is collecting on all forms of revenue that it should be; great! However, if you find that your holistic practice’s NCR is below 90% then it might be wise to perform an internal audit of your billing practices.

Why Are These Financial KPIs Important?

Calculate your practice's NCR and GCR

These financial KPIs are important to your holistic practice’s success because they both provide visibility into how your practice is actually performing in relation to how it should be performing after factoring in any refunds, write-offs, or contractual and non-contractual amounts.

You can’t know what to improve about your practice’s financial standing if you’re not sure how well you’re doing in the first place; knowledge is power, after all! Streamlining your net collection rate can reveal areas within your medical billing and coding processes that might need some more attention and therefore result in an improved overall healthcare revenue cycle that benefits your practice.

How to Calculate Your GCR

Let’s take a look at how to actually calculate your practice’s gross collection ratio; the GCR formula looks like this:

Gross Collection Rate = Total Payments / Charges *100% (for a specific time period)

The gross collection rate only shows what your practice is allowed to collect. For example, you may have charged $200 but you only collected $175 from your insurance payer due to the agreement or contract that you might have signed.

Following this logic, the $175 is below the gross rate.

How to Calculate Your NCR

Since the net collection rate is one of the most important financial metrics to track for your holistic practice, it’s important that you calculate it with frequency—typically about once a quarter is a good measure of your practice’s financial performance.

A low NCR should be seen as an urgent priority since that directly affects the financial standing of your business. Optimizing your net collection rate starts with understanding how to assess your net collection rate. Calculating the net collection rate involves several important steps:

  • Identify the time period that you want to monitor (e.g., 90 or 120 days). Assess data from an earlier period in which the majority of claims would be closed and cleared; ~6 months back is advisable.
  • Calculate total payments (from payers and patients) for the designated time period.
  • Calculate total charges minus approved write-offs (e.g., due to contractual reasons, bad debt, professional courtesy discounts, etc.) for the designated time period.
  • Divide your calculation in step 2 by your calculation in step 3. Then multiply by 100.

In the end, the formula looks something like this:

Net Collection Rate = (Payments / (Charges – Contractual Adjustments)) * 100%

Do this consistently (e.g., every 90 days) for a period of at least one year to get the most accurate average rate.

Once you determine how your baseline collection rate stacks up to that goal, use information from the holistic industry to compare it to industry averages. From there, set a collections metric objective based on how much you would like to see it go up and how this could affect your revenue stream.

Let Holistic Billing Services Handle Your Healthcare Revenue Cycle!

If your holistic practice is overwhelmed by the billing and coding processes, then turn to the experts at Holistic Billing Services to handle your healthcare revenue cycle! Our experts have experience in your specialty and we’re eager to help you thrive. Medical billing and coding is a complicated process that seems to change all the time with new regulations—let our team take that stress out of your daily workflow so you can focus on what matters most: delivering great care to your patients.

Contact us today to learn more!

May 2, 2022
 - by Antonio Arias, MBA, CHBME
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