Charge, allowable, collected: The three numbers that decide whether your practice is doing well

A practice can bill $175 for the same office visit three times in one morning and collect three different amounts. Medicare pays $135.61. Blue Cross pays $150. Aetna pays $125. Everything above those figures gets written off, and none of it is legally collectible from the patient.

That gap between what a practice charges and what it is allowed to keep runs through the first two episodes of “The Back Office,” a monthly video series and podcast from sister publication Physicians Practice.

Host Lucien W. Roberts III, M.H.A., FACMPE, a retired administrator who ran private practices for 35 years, was joined in both episodes by Bert Wilson, CMPA, who spent years on the payer side before moving into practice management. Using Current Procedural Terminology (CPT) code 99214 as a running example, the two walk through how charges get set, where Medicare's number comes from and why gross collection percentage misleads almost everyone who looks at it.

Set the charge above the allowable, but not by much

The first rule is arithmetic. Wilson said a participating practice should never let its charge fall below the contracted payment allowance, because payers reimburse whichever is lower.

"The insurance company is only going to pay the lower of the charges or the payment allowance that has been designated in your individual contract with that carrier," Wilson said.

That creates an obvious temptation to inflate charges. Wilson argued against it. In his own practice, he set charges only a few dollars above what the best-paying contract allowed for two reasons.

The first is what patients see. Someone looking at a $300 charge and a $150 write-off draws conclusions about the practice. Someone looking at $160 against a $150 allowable does not.

"Then once these patients see that half of what you've charged has to be written off as not collectible, I think that leaves a bit of a sour taste in some of the patients' mouths," Wilson said.

The second reason is that the charge only drives revenue some of the time. Three situations determine how much weight it carries: a covered service for an insured patient, where the allowable controls and the charge are irrelevant; a patient covered by a carrier the practice does not participate with, where there is real latitude; and a noncovered service, with cosmetic dermatology being the classic example, where the charge is simply the price.

Where Medicare's number comes from

Medicare's payment for any code is the sum of three relative value units (RVUs), work, practice expense and malpractice, each multiplied by its own geographic practice cost index (GPCI), with the total being run through a single conversion factor.

The RVUs are the same everywhere. The GPCIs are not, which is why a national average of $135.61 for CPT code 99214 lands lower in Little Rock, Arkansas, and higher in San Jose, California. The practice expense index alone can differ 20% to 25% between Northern Virginia and Richmond, Virginia. Malpractice RVUs behave the same way, sitting near zero for an office visit and climbing steeply for surgery.

The formula dates to the 1980s and was built to put a defensible value on each CPT code by accounting for the training and difficulty behind a service, the overhead required to deliver it, and the malpractice exposure it carries. On paper, it still does that.

The conversion factor is where the annual fight happens. It is one number, and moving it moves every payment at once. That is precisely what makes it a budget lever rather than a cost measurement.

Wilson's critique was that the formula's architecture is sound but that its inputs have gone stale. The original relative value research reflected what services cost to deliver. Decades of budget and political pressure have since pulled the conversion factor away from that base.

"The numbers have certainly not kept up in terms of conversion factor, which results in payment, with what's going on in the physician arena," Wilson said.

His fix would be a full reset of the underlying research every five years. He does not expect it.

The pressure behind that is demographic as much as political. When Medicare began in 1965, the average life expectancy was 70.2 years, so the program covered about 5.2 years per beneficiary. By 2024, the average life expectancy was near 79, or roughly 14 years per beneficiary, a 169% increase in years funded per person. Over the same stretch, the ratio of workers to beneficiaries fell from about 4.5-to-1 to 2.4-to-1.

Roberts offered a cautionary note from his own career. He once tied an entire commercial fee schedule to a percentage of Medicare, and the following year, Medicare cut its fees by 5.4%.

"I negotiated myself a pay cut," he said.

The check-in problem nobody has solved

Higher deductibles have pushed a growing share of the allowable onto the patient, moving collection to the front desk. Wilson was blunt about why that is hard. Staff need instant access to every carrier's allowable, and the allowable depends on a procedure code that does not exist yet.

"You can't use an allowance for a code that you don't know at the time that patient checks in," he said.

His practical answer was to collect something rather than nothing. Unless a patient's stop-loss coverage has clearly been met, take a modest copay or deductible payment at the door and reconcile after the claim processes.

Gross collection percentage is a trap

The second episode turned to the metric itself. On a $175 charge with a $150 allowable and $148 collected, the net collection percentage is roughly 99%. The gross collection percentage is 85%, and it would be far worse had the practice charged $300.

That is the trap. A practice that inflates its charges caps its gross collection percentage by arithmetic, not by performance. Charge $300 against a $150 allowable, and the number can never top 50%, no matter how well the business office runs.

Accounts receivable (A/R) carries the same distortion, because A/R is built on charges rather than expected collections. A practice looking at $65,000 outstanding against $160,000 in charges may conclude its billing staff is failing. Once the contractual write-offs post, the genuinely collectible balance might be $2,000.

"All of a sudden, you're realizing we've got a business office that's staying on top of things," Wilson said.

Roberts closed with the short version: Benchmark on net, not gross. Assume Medicare's fees will change again next year. Know patient responsibility before the visit ends, and collect what you can while the patient is still in the building.

Adapted from the first two episodes of “The Back Office.” New episodes drop monthly on Physicians Practice, YouTube and wherever you get your podcasts.