Never Mind the Trick: Collection Percentage and the Future

Derrick B. Stark, CPA

​​My favorite metric is collection percentage.* How do I love thee?
 
I just love its simplicity and no-nonsense nature. It points me in the right direction every time by illustrating that revenues are overstated, internal billing processes are ineffective, software settings are incorrect, or payor CEDI systems are jammed. It occurs to me now that even I have sold the metric short because I have only asked it to tell me what happened in the past.
 
Collection percentage can, however, tell me something about the future. It can provide a reasonable, even probable, estimate of how much cash I will deposit next month based on my current recorded sales.
 
That is handy information to have in advance.

Over time, collection percentages tend to be very predictable. It makes sense because our companies have natural tendencies and recognizable patterns. For example, while a company can have an authorization or documentation problem that surfaces periodically, those problems are often symptomatic of the underlying process and culture surrounding every patient encounter. Likewise, an incorrect setting in the billing software will produce identical results with each and every execution. Given the payor and product concentrations in our businesses, it makes sense that we collect (or lose) money in a predictable pattern.**

Using simple algebra, then, we can use an average or historical collection rate to reasonably determine what our cash deposits will be based on reported sales. Collection percentage = CASH COLLECTED/ALLOWABLE SALES

This is an estimate based on our company and the environment as it exists, not based on unlikely hopes and wishes like the below:

• IF we perform this project, THEN
• IF there are no other issues with these claims, THEN
• IF Medicare reverses course on reimbursement rates, THEN
• IF Medicaid raises its rates so that they are sustainable AND
• Medicaid reduces the tedium that absorbs wildly disproportionate staff time
• THEN, and only THEN can we achieve goals
• End IF

Rather, with algebra (and logic, I suppose), we can: 

• Make reasonable cash flow budgets
• Provide marketing staff with relevant sales goals
• Reduce expenses in advance of cash flow crunches
• Focus excess time on 1-2 incremental projects that will boost profitability 

As we approach the end of the year and another deductible season, now is the time to begin thinking about how to plan for the probable and invest in the future.
​

​*While there are several variants of calculating collection percentages for a given period, all are a derivative of CASH COLLECTED/ALLOWED SALES.
 
**A predictable pattern is not the same thing as an obvious pattern.