What is Cost-to-Collect: How to Calculate & Improve

In healthcare, it costs money to make money—literally. It takes time, effort and funds to collect reimbursement for services rendered. Behind every claim and invoice is a complex web of processes staff must carefully manage to avoid revenue leakage. The monetary sum of these processes is called cost-to-collect.

Understanding this metric can reveal hidden inefficiencies and highlight opportunities for improvement that will ultimately help hospitals keep more of what they earn. Optimizing cost-to-collect is a major step toward long-term financial stability.

What is Cost-to-Collect?

Cost-to-collect is a healthcare organization's total expense to collect payments for services rendered. This includes costs associated with billing, coding, collections, administrative staff, technology and any other resources used throughout the revenue cycle. It reflects how much a provider spends to collect every dollar of patient revenue.

A higher cost-to-collect indicates inefficiencies that can erode profit margins, while a lower cost-to-collect typically signifies streamlined processes and better financial performance. 

How to Calculate Cost-to-Collect

To calculate cost-to-collect, divide the total revenue cycle expenses by the total cash collected over a specific period.

Cost-to-Collect = (Total Revenue Cycle Costs / Total Collections) x 100

For example, if a healthcare organization spends $100,000 on revenue cycle activities and collects $1,000,000 in payments, the cost-to-collect would be 10%.

While the formula is relatively straightforward, things can get tricky when organizations attempt to calculate the numbers to plug into this formula.

Total Revenue Cycle Costs should include all expenses related to patient financial services, such as:​

• Salaries and benefits of billing staff​
• Costs of billing and coding software​
• Outsourced billing services​
• Other standard costs related to patient access, patient account, and health information management

Beyond these core costs, organizations must make individual determinations as to whether this cost should include other elements such as:

• Supplies like paper and postage for patient statements​
• Office space and utilities allocated to billing operations​
• Off-site record management
• Overhead costs for IT

‍

‍

‍Total Cash Collected represents the payments received from patients and insurance companies for services provided.​

For example, if a hospital spends $5 million on revenue cycle operations and collects $150 million in payments, the cost-to-collect would be:​

($5,000,000 / $150,000,000) × 100 = 3.33%

This means the hospital spends 3.33 cents to collect every dollar of revenue.​

Both of these metrics, total revenue cycle and total cash collected, should be measured over the same period. If an organization measures both metrics over one month, staff can calculate cost-to-collect for that month. To calculate average cost-to-collect over a year, an organization must track total revenue cycle expenses and cash collected over that year.

Breaking Down Cost-to-Collect by Functional Area

Breaking down cost-to-collect into specific functional areas can help achieve a more nuanced understanding. For example, the patient access category includes funds for front-desk operations, insurance verification, and prior authorizations. The collections category includes follow-ups on unpaid claims, patient communication, and debt recovery efforts.

By analyzing these areas separately, organizations can pinpoint where inefficiencies lie and target improvements more effectively. If cost-to-collect starts to climb, internal audits of individual departments can help identify contributing issues. Key areas to examine include:​

• Patient Access
• Coding and Billing
• Claims Management
• Payment Posting
• Patient Collections

What is a Good Cost-to-Collect Benchmark?

Benchmarking cost-to-collect helps healthcare organizations measure their performance against industry standards. Over the last decade, the standards for cost-to-collect have risen as more and more financially savvy organizations invest in software to help lower costs.

According to industry data, the average cost-to-collect now typically falls between 2% and 4% for high-performing healthcare organizations, with the best practice standard falling closer to 2-3%. According to a survey by AKASA, healthcare financial leaders reported an average cost-to-collect of 3.68%. 

Numbers ultimately vary based on factors such as practice size, specialty and patient demographics, but generally, a cost-to-collect higher than 5% may warrant further investigation. Continuous monitoring and comparison with industry benchmarks can guide organizations in setting realistic goals for improvement.

Strategies to Improve Cost-to-Collect in Healthcare

Reducing cost-to-collect isn’t just about cutting costs; it’s about optimizing processes to enhance efficiency and ensure timely revenue collection. Here are some proven strategies:

Optimize Billing & Coding Processes

Accurate billing and coding are fundamental to reducing claim denials and accelerating reimbursements. Start with regular staff training to ensure coding staff stays updated with the latest regulations and guidelines. Implement continuing education and conduct periodic audits to ensure compliance with standards for billing codes, CPT Codes, and ICD-10 Codes.

Enhance Patient Payment Collection

Improving patient payment processes and communication strategies can significantly impact overall collections. Financial counselors should provide resources to help patients understand their insurance coverage and payment expectations ahead of service. Transparent pricing with upfront cost estimates and flexible payment plans can go far in assisting patients in managing their balances after services are rendered.

Patients also benefit from options in the collection process. Do they want to be contacted via text, email, or phone? Would they prefer to pay online, on their phone, or at a payment kiosk? The hospital is responsible for making the process run as smoothly as possible for patients to enhance collection amounts.

Leverage Technology & Automation

Automating repetitive tasks within the revenue cycle can lead to significant cost savings by minimizing manual errors and expediting routine functions at multiple points along the revenue cycle. Here are just a few processes within the revenue cycle that can benefit from automation:

• Electronic Health Records (EHR) Integration: Integrate billing processes with EHRs for seamless information flow.
• Claims Scrubbing: Implement AI-powered solutions for claims management to flag potential errors before submission, decreasing the likelihood of denials and the need for rework.​
• Automated Workflows: Use automation for routine tasks like insurance verification, payment posting, and follow-ups.
• Analytics Tools: Implement data analytics to track performance metrics and identify areas for improvement.
• Insurance Discovery: Invest in helpful software tools like insurance discovery, automatically detecting coverage on patient accounts across an exhaustive list of payers.

Reduce Administrative Overhead

Reducing unnecessary administrative tasks frees up staff time for higher-value activities. Start by analyzing staffing. Audit existing staff to ensure each person handles appropriate work and performs their job duties efficiently using standardized processes. If appropriate, consider consolidating billing functions to one location or department to avoid redundancy. 

If staff face too much work and experience overwhelm, consider outsourcing functions like medical coding or collections to specialized service providers. For existing third-party vendors, investigate how to negotiate contracts.

Monitor Key Performance Indicators (KPIs)

By identifying KPIs and tracking progress over time, organizations can better understand the impact of any changes and any new operational areas that need attention to improve other overarching metrics like cost-to-collect. KPIs to consider monitoring include:

• Days in Accounts Receivable (AR): Measures the average time it takes to collect payments. A lower DAR indicates a more efficient revenue cycle.
• First-Pass Acceptance Rate: Tracks the percentage of claims accepted on the first submission. A higher rate means fewer reworked claims and lower administrative costs.
• Denial Rate: Monitors the percentage of claims denied and analyzes the root causes. A high denial rate suggests issues with coding, documentation or insurance verification.
• Patient Collection Rate: Evaluate the effectiveness of patient payment collection processes.

The Importance of Cost-to-Collect

Understanding, monitoring, and constantly improving cost-to-collect is vital to maintaining an organization’s financial health. A lower cost-to-collect means more resources can be allocated to patient care, improving financial performance and patient outcomes and positioning the organization for long-term success.

Unpaid claims and hidden coverage gaps can drive up cost-to-collect. Office Ally’s Insurance Discovery helps uncover unknown patient coverage, reducing denials and accelerating reimbursements. Learn more and schedule a free software demo here.