If you pay a percentage of collections, the definition of that word is the most important term in the agreement — and it is usually the vaguest. Gross receipts, net of refunds, including or excluding patient payments each produce a different fee on identical performance.
Percentage-of-collections billing is simple to describe and easy to sign. Then the first invoice arrives and the practice discovers that the vendor and the practice have been using the same word for two different amounts.
This is the single largest source of dispute in billing relationships, and it is almost always preventable with one paragraph.
The questions that need answers
Gross or net? Is the percentage applied to money received, or to money received after refunds and payer takebacks? A recoupment three months later reverses revenue you already paid a fee on. Does the fee reverse too?
Are front-desk collections included? Copays and patient payments collected by your own staff, at your own counter, with no involvement from the billing company. Many contracts include them by silence.
Capitation? Per-member-per-month payments arrive whether or not anyone submits a claim. Charging a percentage of a capitated payment charges for work that was not done.
Quality and incentive payments? Value-based bonuses and shared savings are collections in the plain sense of the word, and they are not the product of claim work.
Legacy A/R? Money collected on claims submitted before the engagement started. Someone else did that work.
Why vendors leave it vague
Not always cynically. "Percentage of collections" sounds self-explanatory, and a vendor whose systems report one number naturally uses that number. But the ambiguity runs in one direction, and the practice is the party that discovers it later.
What to insist on
A written definition naming each category explicitly, and a monthly statement that reconciles the fee to a claim list you can check against your own practice management system. Not a total — a list. If a fee cannot be traced back to specific claims, the definition is not doing any work.
The other term worth settling at the same time: what happens to outstanding A/R after termination, who works it, for how long, and at what rate. Those two paragraphs prevent most of the arguments that end billing relationships badly.
Model both quotes on last year
Take twelve months of actual receipts and apply each vendor’s definition. The resulting numbers are frequently further apart than the headline percentages suggest.
That exercise takes an hour and is the only honest comparison available.
Get the exclusions in writing
Refunds, recoupments, credit balance corrections, interest, and any settlement payments. Each is a category where a fee could be charged on money you do not keep.
Decide about patient payments deliberately
Where your staff collect at the desk and the vendor plays no part, paying a percentage on that money is a transfer for no service.
Where the vendor runs statements and patient follow-up, including it is reasonable. The point is to decide rather than to inherit the vendor’s template.
Common questions
- What should "collections" mean in a billing contract?
- It should be defined explicitly: which receipts count, whether patient payments are included, and whether refunds, recoupments and credit balances are netted out.
- Should patient payments count toward the billing fee?
- That is negotiable and depends on who collects them. If your front desk takes the money, paying a percentage on it is worth questioning.
- Are refunds and recoupments deducted?
- They should be. Otherwise you pay a fee on money that was returned to a payer, which means the fee outlives the revenue.
- What about collections on claims from before the contract?
- Define it. Legacy A/R collected by a new vendor is a common area of dispute, and it needs settling before either party works it.
- How do I compare two percentage quotes?
- Apply each definition to your actual receipts. Two vendors quoting the same percentage against different bases are not quoting the same price.
Denials Piling Up?
We handle the revenue cycle end to end — coding by certified coders, claim submission, denial management and appeals, and A/R follow-up, with six reported numbers every month.