The net collections ratio serves as a key financial indicator for physician practices, showing what was actually collected as a proportion of what the practice should have collected. Another definition, provided by Jennifer O’Brien for the American Academy of Orthopedic Surgeons, is “that percentage of total collectable money that the practice successfully collected (total collections minus refunds divided by total charges minus contractual and coding adjustments).” Even though this number seems straight forward, many practices miscalculate it and make decisions based upon erroneous results.
Payment posters often arrive at a practice with training they acquired at another practice. Understanding of different adjustment types and allowable amounts for auto insurance, commercial insurance, and other payers can vary among team members within a medical practice. Common errors made while recording adjustments can obscure financial performance issues, depriving the practice of the full amount of revenue owed. At many practices, you can find payment posters entering contractual allowances and allowable amounts directly from the remittance advice or EOB. Lacking confidence in their ability to correctly calculate contract amounts, medical practice employees frequently default to a belief that the insurer is always right, yet the National Health Insurer Report Card published by the American Medical Association demonstrates otherwise, finding payer accuracy as low as 62 percent. Large payers with payment accuracy rates below 90 percent are not hard to find. The true source for allowable amounts should be an internally maintained fee schedule based on a specific contract, not the insurer’s remittance advice. Because so many medical practice employees make errors posting adjustments, other employees often emulate them and assume that they are right.
Another common mistake involves classifying the difference between charges and the payment received from the insurer as a “contractual allowance”. Suppose that a practice charges $300 for a procedure and has negotiated reimbursement of $180 for that procedure with the insurer. However, the patient owes 20 percent coinsurance, so the insurance company writes a check for $144. The correct way to post the payment would be to record a contractual adjustment of $120 ($300 gross charges less the $180 allowed amount per the contract), to post the insurer’s $144 payment, and then bill the patient for the remaining $36. However, it is not uncommon for payment posters to make the mistake of writing off to contractual allowance the difference between the $300 charge and the $144 check from the insurer, incorrectly writing off $36 owed to the practice.
The American Academy of Orthopedic Surgeons provides a similar example of a surgery with multiple procedures. Per the contract, subsequent procedures should be paid at a reduced percentage. However, in the example, the insurer denies payment for one of the procedures:
“If the payor inappropriately denies payment for the second procedure, do not make the mistake of writing off the entire denial as a contractual adjustment. If you do, you compromise your data and your practice will appear to have a higher net collections ratio than it actually does.”
In an era of high deductible plans and moving patient responsibility, practices increasingly have a high volume of credit balances. Overpayments from patients can distort collections ratios as well, covering up the impact of underpayments by insurers.
Understanding the payments the practice should expect to collect is critical to having accurate financial reporting to guide managerial decision making. Many practices, struggling to recruit, retain, and train skilled collectors, coders, and payment posters, are turning to hybrid practice solutions.
