Net Collection Percentage (NCP) measures how effectively your practice collects the money it is contractually owed. It’s calculated by dividing your actual collections by your expected collections (the allowed amounts after insurance adjustments). For example, if your practice was supposed to receive $100,000 in payments from payers last month and you collected $97,000, your NCP is 97%.
This is different from a gross collection rate, which compares collections to your full ‘list price’ or chargemaster rates. NCP is a far more accurate measure of your revenue cycle’s performance. The industry benchmark for a high-performing practice is an NCP between 95% and 98%.
Why This Matters to Healthcare Providers
During a sale, buyers see your NCP as a direct reflection of your practice’s financial health and operational efficiency. A high and stable NCP shows buyers your revenue is reliable and your billing operations are solid, which supports a higher valuation for your practice.
Example in Healthcare M&A
Scenario: A private equity group is evaluating two similar cardiology practices, both with an Adjusted EBITDA of $2 million. Practice A has maintained an NCP of 98% for three years. Practice B’s NCP has fluctuated and currently sits at 92%.
Application: The buyer views Practice A’s earnings as high-quality and predictable. They have confidence that the $2 million EBITDA is sustainable. They see Practice B’s lower NCP as a risk. It suggests operational issues like poor coding, high claim denials, or weak follow-up on unpaid accounts.
Outcome: The buyer offers Practice A a higher valuation multiple (e.g., 8x EBITDA) because of its proven operational excellence. Practice B receives a lower offer (e.g., 6.5x EBITDA) to account for the perceived risk and the investment the buyer will need to make to fix the revenue cycle issues. The difference in NCP directly results in a multi-million dollar difference in valuation.
Related Terms
- Revenue Cycle Optimization – Improving your NCP is the main goal of revenue cycle optimization.
- Days Sales Outstanding (DSO) – This measures how fast you collect payment, while NCP measures how much you collect. Both are key indicators of financial health.
- Denial Rates – A high claim denial rate is a primary reason for a low NCP. Managing denials is essential to improving your collections.
Discover the key metrics that determine your practice’s true market value in today’s acquisition landscape. Unlock PE Valuation Insights →
About the SovDoc M&A Glossary
Hand-curated by our deal-makers and analysts, the SovDoc glossary turns complex mergers-and-acquisitions jargon into clear, plain-English definitions.
Want to learn more? Explore the rest of our glossary or reach out to our team for deeper insights.
Frequently Asked Questions
What is Net Collection Percentage (NCP)?
Net Collection Percentage (NCP) measures how effectively your practice collects the money it is contractually owed. It’s calculated by dividing your actual collections by your expected collections (the allowed amounts after insurance adjustments). For example, collecting $97,000 out of an expected $100,000 results in an NCP of 97%.
How is NCP different from gross collection rate?
NCP differs from gross collection rate in that NCP compares collections to the expected amounts after insurance adjustments, while gross collection rate compares collections to the full ‘list price’ or chargemaster rates. NCP provides a more accurate measure of revenue cycle performance.
Why is NCP important to healthcare providers during a practice sale?
During a sale, buyers view your NCP as a direct reflection of your practice’s financial health and operational efficiency. A high and stable NCP demonstrates reliable revenue and solid billing operations, supporting a higher valuation for the practice.
How does NCP affect valuation in healthcare mergers and acquisitions?
In healthcare M&A, a higher NCP signals high-quality, predictable earnings, leading to higher valuation multiples (e.g., 8x EBITDA). Conversely, a lower or fluctuating NCP indicates operational risks, resulting in lower valuation multiples (e.g., 6.5x EBITDA) due to concerns about revenue sustainability.
What are some related metrics to NCP and why are they important?
Related metrics include Revenue Cycle Optimization, which aims to improve NCP; Days Sales Outstanding (DSO), measuring how fast payments are collected; and Denial Rates, where high denial rates often cause low NCP. Together, these metrics provide a comprehensive view of a practice’s financial health.