While not the only means of evaluating a provider’s revenue cycle, the net collection percentage, or NCP, can directly impact the level of financial support, if any, received by a provider under an arrangement with a health system.
Specifically, if a provider under a financial assistance arrangement is not effectively collecting reimbursement, a higher level of financial support would be paid by the health system to the provider, negatively impacting the health system’s bottom line. Accordingly, a health system should work to ensure it understands a provider’s NCP prior to commencement of a financial assistance arrangement.
NCP can be simply defined as the percentage of dollars a provider collects from what is contractually owed to him or her. It is a measure of a provider’s effectiveness in collecting contracted reimbursement amounts and allows a provider to determine the amount of revenue lost due to reasons such as uncollectible debt, untimely filing, and other non-contractual adjustments.
The Medical Group Management Association (MGMA) Cost and Revenue Survey refers to the net collection percentage as the “adjusted fee-for-service collection percentage.” MGMA calculates the adjusted fee-for-service collection percentage using the following formula
:
Over the last several years, we have observed trends that demonstrate an indirect correlation between NCP and annual stipend amounts. For example, per MGMA, the NCP specific to the specialty of anesthesiology at the mean in 2014, 2015, and 2016 was 91.63%, 90.00%, and 87.72%, respectively, reflecting a compound annual growth rate (CAGR) of approximately -2%. Additionally, per MGMA, the annual stipend specific to the specialty of anesthesiology at the mean in 2014, 2015, and 2016 was $2,601,833; $2,824,339; and $2,959,895, respectively, reflecting a CAGR of approximately 7%. Accordingly, as NCP has decreased, the annual stipend amount has increased over the same time period.
To illustrate the impact of a low NCP as it relates to a professional services arrangement with a provider, consider the following fact pattern specific to an anesthesiology physician practice:
1. Gross charges of $10,000,000
2. Contractual adjustments of $7,000,000
3. Collections of $2,500,000
4. Total operating expenses of $5,000,000
5. Current financial assistance of $2,500,000
Using the aforementioned MGMA adjustment formula, the adjusted fee-for-service collection percentage for this anesthesiology physician practice is approximately 83%, determined as follows:
1. Collections of $2,500,000
2. Gross charges of $10,000,000 less contractual adjustments of $7,000,000 = $3,000,000
3. Collections of $2,500,000 divided by $3,000,000 = 83%
However, if we assume the provider could improve his or her collection performance to a net collection percentage of approximately 88% (consistent with the MGMA 2016 mean), approximately $140,000 in additional collections would be generated, decreasing the financial assistance by a corresponding amount. The additional $140,000 was determined as follows:
1. Gross charges of $10,000,000 less contractual adjustments of $7,000,000 = $3,000,000
2. $3,000,000 multiplied by a NCP of 88% = $2,640,000 in total collections
3. Total adjusted collections of $2,640,000 less original collections of $2,500,000 = $140,000
If the anesthesiology physician practice is able to improve its collection performance to 96% (the MGMA 2016 75th percentile), approximately $380,000 in additional collections would be generated. Health systems should ensure an understanding of the NCP as it directly impacts the level of financial support, if any, received by a provider.
In turn, the level of financial support received may have potential implications specific to federal laws related to fair market value (specifically, the Stark Law and Anti-Kickback Statute). Accordingly, as it relates to physician services, health systems should work to ensure compliance with all applicable healthcare regulations.
Kathryn A. Culver, Manager - Healthcare Consulting, PYA
Kathryn Culver is a consulting manager within the valuation service line at Pershing Yoakley & Associates, P.C. She performs fair market valuations for physician practice groups, hospitals, and health systems, and evaluates compensation agreements between health facilities and physicians. In addition, Kathryn is a Certified Public Accountant and has a strong foundation in accounting and finance. She has presented for several organizations on topics such as healthcare valuation, practice valuation, and physician compensation planning and has co-authored articles in various healthcare industry publications.
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