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Revenue Cycle Benchmarks: Improve Your Cost to Collect

From a strict payer landscape and high denial rates to ever-increasing complexity in coding and compliance, earning an honest buck in the healthcare industry seems to become more difficult every day. With payer denial rates jumping from 8% to 11% in just one year and every denied claim costing between $25 and $118 to rework, it’s clear that the problem is only getting worse. For practices that don’t keep a close eye on their revenue streams or even know what to measure, difficult work becomes impossible. Of course, every business needs to measure its costs and its payments, but there’s another critical measurement that, because of how the industry is structured, is even more important in healthcare than almost any other industry. That’s “cost to collect.”

Cost to collect includes all costs incurred during the entire revenue cycle process from patient pre-registration through final payment. This number can be difficult to calculate because it can be a long, complicated process and it involves many moving parts across revenue cycle management operations. However, it’s important to calculate to get a clear picture of revenue cycle expenses, operational inefficiencies, and the overall practice’s financial health.

Several factors are making it difficult to control revenue cycle costs. Labor costs are rising due to high turnover rates and staffing shortages. Payers are tightening reimbursements, while simultaneously increasing patient responsibility. Additionally, compliance complexity makes charge capture more labor-intensive and errors more frequent, which leads to expensive, time-consuming back-and-forth with payers and contributes to higher denied claims. In this environment, even small improvements can translate into significant annual savings for hospitals and physician groups while helping increase cash flow and support better financial performance.

When considering the annual budget, cost to collect is a critical metric, as important as days in Accounts Receivable, denial rate, and clean claim rate. These metrics are commonly tracked as part of revenue cycle KPIs used to evaluate the efficiency of the hospital revenue cycle or physician practice billing operations.

In this article, we’ll discuss how to calculate your cost to collect. We’ll talk about how industry benchmarks provide context to help you understand what your current performance actually means. We’ll identify key cost drivers and practical best practices to reduce costs and manage your cost to collect more effectively.

What is Cost to Collect?

When looking at cost to collect as a whole, there are quite a few components to consider. The cost of labor is the most substantial expense. Salaries for billing staff, coding teams, denial specialists, patient financial services representatives, and staff benefits all fall under the cost of labor and contribute to overall collection costs.

Technology is also a major cost driver. These costs include electronic health records, practice management systems, clearinghouse fees, claim scrubbing tools, and data analytics tools that help teams monitor key performance indicator trends throughout the revenue cycle management workflow.

Third-party costs can add up quickly, too. Outsourced RCM services, collection agencies, consulting fees, or working with a medical billing company often cost much more than having an in-house equivalent, even on a temporary basis. Administrative overhead also factors in. Office space leases or mortgages, management oversight, and compliance support and training all must be added to the equation.

When all those costs are wrangled, the math becomes pretty simple. Total the revenue cycle expenses and divide that number by the net patient revenue generated during the same period. When you multiply that number by 100, you have the cost to collect as a percentage of net patient revenue.

Plainly written, the formula looks like this: 

Cost to Collect = Revenue Cycle Expenses ÷ Net Patient Revenue × 100

Lower percentages generally indicate a more efficient revenue cycle, but the number should be compared to similar organizations of the same practice size specialty mix. Benchmarks are only meaningful when evaluated against organizations with comparable practice size, payer mix, and operational structure.

What is a Good Cost to Collect Number?

In the medical industry, a typical cost to collect number falls in the 3% to 6% range. Best-in-class organizations operate at the lower end of the range with strong collections, low denial rate, a high clean claims rate, and compliant processes that help collect every dollar owed for services rendered.

Small practices tend to trend in the higher percentages due to fixed overhead spread across fewer claims, while large, integrated systems may have lower per-claim processing costs due to higher claim volume and stronger revenue cycle management infrastructure.

Benchmarks can be impacted significantly because of the varied coding complexity and payer rules for different specialties. Payer mix also affects the cost structure, with government payers and complex managed care contracts often increasing administrative burden within the revenue cycle process.

In order to set goals realistically, it’s important to compare your cost to collect numbers to organizations of similar practice size, specialty, and payer mix. There is no universal number, but industry benchmarks provide helpful context for evaluating financial health and operational efficiency.

Factors That Increase Cost to Collect

There are several factors that can increase your cost to collect and make it difficult to get the number under control.

  1. When more denied claims occur, your team needs to fix and resubmit them, which takes extra time and delays payment. This type of rework increases administrative workload and slows the ability to collect every dollar owed.
  2. When billing tasks are handled manually and patient information is entered incorrectly, mistakes multiply. Errors during eligibility verification, coding, or claim submission can reduce your clean claim rate, leading to additional work correcting and resubmitting claims.
  3. If you work with many complex or strict insurance plans, your staff may spend more time on phone calls, appeals, and follow-up to address denied claims and resolve discrepancies in payment posting or reimbursement amounts.
  4. When staff are new or not fully trained, errors are more likely. But having more staff than you need also increases payroll costs without improving results, which raises overall revenue cycle costs and reduces efficiency.
  5. The longer an account sits unpaid in accounts receivable, the more reminders, calls, and follow-ups it requires. Each additional touchpoint increases administrative work and lowers your overall collection rate.
  6. If patients do not clearly understand what they owe, or if you do not collect at the time of service, your team must spend more time later sending statements and making calls to secure total cash collected from patient balances.

Strategies to Reduce Cost to Collect

  1. Check insurance coverage through eligibility verification before the visit and confirm required authorizations. Submitting a clean claim the first time dramatically improves your clean claim rate and helps reduce denied claims.
  2. If certain billing tasks are falling behind, consider outsourcing areas like denial follow-up or aging accounts receivable. A specialized medical billing company or provider of RCM services can sometimes work these balances faster and recover every dollar that may otherwise go uncollected.
  3. Use automation tools and data analytics tools to handle routine billing steps like claim scrubbing, coverage confirmation, payment posting, and reporting. Automation reduces manual errors and helps reduce costs across the revenue cycle process.
  4. Regularly monitor key performance indicator trends such as denial rate, collection rate, and days in accounts receivable. These revenue cycle KPIs help leadership identify operational problems early before they grow into larger financial issues.
  5. Create clear, consistent billing workflows across the entire revenue cycle management operation. Standardized processes improve accuracy, simplify training, and support a more efficient revenue cycle.
  6. Give patients clear cost estimates and explain what they owe before or at the time of service. Early communication improves cash flow, increases total cash collected, and reduces the need for repeated billing statements and follow-up calls.

How to Optimize Your Revenue Cycle With Claimocity

Claimocity’s automated revenue cycle management platform evaluates your current revenue cycle process performance in real time, helping practices identify operational bottlenecks that affect total revenue, cash flow, and overall financial health.

Our AI-Powered Charge Capture technology helps reduce denied claims by improving coding accuracy and helping reduce claim denials before they occur. This helps speed reimbursement and improves the likelihood of submitting a clean claim the first time.

The system also identifies billable events so you can collect every dollar associated with services performed. Detailed analytics help you track revenue cycle KPIs, measure total cash collected, and monitor long-term performance trends that affect your bottom line.

With improved operational visibility and automation across your hospital revenue cycle, organizations can increase cash flow, reduce administrative burden, and achieve better financial performance.

Let’s Get Started

In today’s competitive reimbursement environment, cost to collect is a crucial indicator of a practice’s financial health. Healthcare organizations should calculate their current percentage and compare results against similar organizations based on practice size, specialty, and payer mix.

Evaluating these numbers against appropriate industry benchmarks allows leadership teams to better understand operational performance and identify areas where revenue cycle costs can be reduced.

Process optimization, automation, and the ability to monitor key performance indicator trends are essential for maintaining an efficient revenue cycle and improving long-term financial health.

Expert RCM services, modern medical billing technology, and automation tools can significantly reduce collection costs while helping practices capture every dollar of earned patient revenue.

Contact Claimocity today to learn how automation can help increase cash flow, improve total cash collected, and reduce your cost to collect.

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