Gross charges overstate what hospitals and practices actually collect. Estimate net patient revenue and contractual allowances by payer, and see how payer mix looks on a gross versus a net revenue basis.
How it works
Estimate net patient revenue and contractual allowances from gross charges and expected collection rates by payer, and compare payer mix on a gross and a net basis.
Net revenue(payer) = Gross charges × Expected collection %
Contractual allowance = Gross charges − Net revenue
Net-to-gross ratio = Σ Net revenue ÷ Σ Gross charges
Net mix = Net revenue(payer) ÷ Total net revenueCommon uses
- Net revenue budgeting and forecasting
- Evaluating payer contract changes and mix shifts
- Monthly contractual allowance estimates
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Payers | Medicare | 312,000,000 | 31.5 Medicare Advantage | 268,000,000 | 29.0 Medicaid managed care | 214,000,000 | 22.0 Commercial | 156,000,000 | 46.0 Self-pay / uninsured | 50,000,000 | 8.0 |
| Expected net patient revenue | $298,840,000 |
| Contractual allowances | $701,160,000 |
| Net-to-gross ratio | 29.9% |
| Largest payer (net) | Medicare |
Payer mix measured on net revenue differs from the gross mix because collection rates vary widely by payer. Deduct expected bad debt and charity care separately if the collection rates above exclude them.
Interpreting the results
- Derive collection percentages from actual cash collected on closed accounts by payer, not from contract rates alone.
- A shift toward lower-paying payers can reduce net revenue even when gross charges rise.
- Recalculate after chargemaster increases: gross charges rise, but contracted payments usually do not move with them.
Frequently asked questions
What is a contractual allowance?
A contractual allowance is the difference between gross charges and the amount a payer is contractually obligated to pay. It is recorded as a reduction of revenue so that net patient revenue reflects expected collections.
Why does payer mix differ on a gross and net basis?
Collection rates vary widely by payer, so a payer that represents a large share of gross charges may represent a much smaller share of net revenue. Net mix shows where revenue actually comes from.
How should collection percentages be estimated?
Use historical cash collected on closed accounts by payer, adjusted for known contract changes. Payment terms alone can miss denials, underpayments and patient balances that are never collected.
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