What Percentage of Collections Should You Be Paying Your Billing Company?

Nisha Mehta, MD
May 14
9 min read

While there are many ways to measure success in private practice, from a financial perspective, the bottom line is whether or not you make money. As such, one of the most critical things you have to do from a business standpoint is optimize revenue cycle management and actually get paid for what you do. Some private practices are able to handle billing in house, whereas for others, it makes more sense to outsource their billing operations. If you choose to utilize a third party billing company, you may find yourself overwhelmed by the number of billing companies that exist. Many factors determine whether a billing company is a good one, but a crucial piece is how much they charge. We often see doctors in our online physician communities asking what percentage of their collections is appropriate to pay the billing company. Below, we’ll cover the typical range of percentages that billing companies charge, what determines where you should fall, and the pitfalls of just going for the cheapest rate you can find.

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Typical percentage of collections billing companies charge, depending on the services offered and technology implemented

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How do billing companies determine what they charge?

While every billing company understands that competition is tight, they walk a fine line between offering competitive pricing and ensuring that they can cover their overhead and deliver on the promises that they make to your private practice. Depending on the billing company, the services they provide, and what their overhead costs are, charges can vary widely. However, some factors they take into consideration include:

Claim volume - Larger or high volume practices benefit from economies of scale, so they’ll want to know how many patients you have and how many you see daily. Many billing companies have a minimum required volume of anticipated claims before they will take on a new client, which is why some billing companies may not be able to offer services to lower volume practices (a frustration often faced by startup private practices!).

Specialty / subspecialty - This determines what kinds of services you will be billing for and how lucrative each of those claims will be for them

Payer mix - Determines how much your payers pay for each encounter, how long it typically takes to get paid, and how hard it will be to collect the money owed

Number of physicians - this will determine claim volume, as above

Average per volume claim amount - similar to specialty, this will take into account the typical types of patients and services provided by this practice (for example, a subspecialist that builds up a niche practice may have a higher percentage of highly compensated claims)

Number of states the practice provides services in - may add to the complexity of managing payers and operations depending on different payers and regulations

Add on services - many billing companies provide additional services, such as credentialing, contracting, practice consulting, & coding services

EHR and other technology used by the practice - will determine how well revenue cycle management integrates with the billing company’s operations; some billing companies may require that you use a certain software to ensure smooth operations.

What models can be used by billing companies for their fees?

The most common model that we see on the communities is to charge a percentage of collections. However, others also exist, such as charging a certain fee per claim. However, others also exist. As this article focuses on the appropriate percentage rate for them to charge, we will focus on that, but here are the pros and cons of the most common billing company fee models.

Common fee models billing companies use, including percentage of collection, per claim, hourly billing, and add on services

Percentage of collections

You are billed for a percentage of the amount of money collected every month. This is popular for both practices and billing companies because most practices generate a steady stream of income that guarantees both parties get their money according to the volume of work done. It also incentivizes the billing company to go after your collections more aggressively, since they are vested in your success.

Note that some billing companies will implement a minimum monthly fee to protect themselves if the total collections in a given month fluctuate such that there is a month where they receive very little in terms of percentage of collections. This most often happens if you are a startup or a small private practice where the billing company is worried about your volume in some months not covering their expenses and opportunity cost.

Per claim

Some medical billing companies will charge a fixed amount per claim that they process, regardless of whether it’s collected. This fixed fee typically ranges between $3-10 based on reports from our community members, likely based on competition in that market for billing services and the factors discussed above.

As a private practice owner, you should understand that in this scenario, the billing company has less skin in the game about the final outcome of the claim, as they are not paid based on collections. This may mean that they don’t double check their work when submitting claims, leading to a higher percentage of claims getting rejected, or that they won’t be incentivized to chase collections on accounts receivable or rejected claims. This can dramatically decrease how much money you see coming in, particularly in this day and age, where it can feel like many payers are looking for excuses to deny claims.

Hourly billing

This is not a common model that we see, but some companies charge an hourly rate. As a private practice, this could be risky, because there’s no great way to audit how much work is being done in any given hour, or guarantee the quality of that work. However, very new practices may be forced to accept this model if their claim volume makes it hard for a billing company to take them on as a client in the other models.

Another situation where you may see this type of billing structure is for add on services like consulting calls for how to improve revenue cycle management, help train your staff, etc, as delineated below.

Add on services

Many billing and coding companies offer other services, such as doing the coding on encounters, auditing charts, credentialing, contracting, providing technology, providing compliance feedback, or helping with other operational concerns such as adequately training the billing and coding team within your practice or providing marketing services. If these are offered, they will likely have different rates and fee structures.

Additionally, some billing companies may have a hybrid of these models, or charge different percentages based on the exact service. For example, claims submissions may be charged at a different rate that appeals management.

What percentage of collections should you be paying your billing company?

This is the million (or multimillion!) dollar question. Of course, there’s no one size fits all answer, but most billing companies charge between 4-10% of collections.

Note that this is on collections, not on the amount billed (be careful of those charging these rates on the amount billed, as again, it may lead to sloppiness in the way that we mentioned under the per claim model above.

That’s a large range, of course. We find that the majority of private practices on our physician communities say that their companies charge between 5-7% of collections.

Breaking this down further, here is where we typically see rates fall:

<4%: Usually more basic services (less incentive to chase collections); may be AI based or without a significant amount of operational presence in the United States
4-7%: High volume practices or when AI is able to handle a percentage of the work
7-10%: Typically smaller practices, or when many additional services are included, such as coding services, denial management, or more complicated revenue cycle and accounts receivable services

PSG PERK: If you are exploring potential billing companies, our partners at Cosentus may be able to help. Cosentus has been highly reviewed by several physician members of our communities. They can help with credentialing, billing and coding, revenue cycle management, and accounts receivable services. As part of a perk for PSG members, they offer a free professional billing and coding review as well as 5% off services through our affiliate link with the code PSG5OFF.

What are reasons why you might not want to go with the billing company that charges the smallest percentage of collections?

As alluded to above, you want the billing company to have skin in the game. If they are getting paid a very small percentage or the collections or a small fee per claim, recognize that their incentive to get you paid is similarly low. These companies may technically get the work done, but the question is, will they get it done well? Will they be sloppy with their coding services or submissions processes, and will they be incentivized to get on the phone with the payer to dispute charges?

While we are very big fans of evolving AI in this space, relying solely on AI based operations without human oversight may (at the moment at least) result in claims being dropped or unpaid, or higher rates of error in more unique cases.

Additionally, if a billing company is solely based overseas without an operational presence in the United States, you may have less ability to navigate issues efficiently or be less protected legally if something goes significantly wrong.

Remember, this is your livelihood, and if your claim is denied or if collections aren't chased, you don’t get paid anything. Typically, the amount you make per claim is significant, so don’t be penny wise and pound foolish in paying less to the billing company at the risk of bringing in less in collections overall.

What are other red flags that a billing company may not be a good fit, or that you may need to make a change?

It’s important to hold the billing company accountable for what they are being paid to do. Some red flags that may indicate that there will be an issue or that there is already an issue include:

10 red flags to be aware of when working with a billing company for your private practice

Very low fees compared to the competition: Discussed above
Billing based on the charges they bill instead of collections: You want them to be incentivized to prioritize quality that actually leads to money coming in the door
Lack of transparent reporting of metrics: Your billing company should provide you with a monthly report of what was billed out, accounts receivable, denied claims, etc., so that you can see how they’re performing
A high rate of accounts receivable uncollected past 90 days, or a low rate received within 30 days: Accounts receivable (AR) is the amount of money that you’ve billed out to payers, and you want to understand how quickly that money is coming in and how much of it is outstanding at certain benchmarks. Typically, you’ll want AR to come in as close to 30 days as possible, with the vast majority (> 90%) at 90 days.
Low First Pass Resolution Rate (FPRR) - FPRR refers to the percentage of claims paid without having to resubmit them, and you want this to be over 90%.
High Denial Rate: Denial rates are the percentage of claims denied, and should be under 5-10%. If the numbers are creeping higher, it indicates sloppiness with coding or possibly a front office issue with checking for eligibility, so this may not be on the billing company. You’ll want to dig deeper as to why things are getting denied.
Low Net Collection Rate - The net collection rate compares what you actually collected versus what you thought you should collect (after adjustments), and should be over 95%.
Low Clean Claims Rate - The clean claim rate measures the percentage of claims that are submitted without errors on the first attempt, and should be above 95%.
High Lag in Charge Entry - You want the time between the date of service and when the claim is entered to be as quick as possible, ideally less than 48 hours. Of course, this could depend on when the notes are completed and eligible to be billed, so take this into account.
Lag in posting payments - payments should be posted within 24-28 hours once received.

It’s important to hold the billing company accountable to standard key performance indicators (KPIs) to ensure that they are doing their best to get you paid.

If you find a company that is offering very low rates for billing, ask them about these metrics for their clients, as well as how they manage denials, so that you can understand whether or not they are adequately incentivized to take ownership of this critical part of revenue cycle management.

Conclusion

Choosing a billing company can be stressful, and it’s important to know what questions to ask when you’re vetting one. A huge part of your decision will likely be how much that you have to pay for the billing company’s services, but it’s important to keep the raw percentage number in context with the services being provided, and the quality of those services, as ultimately what matters is who can bring the most money into your practice post fees. The notes above should help you understand a general range of where your practice fees will likely fall, what should be included, and when a change may be necessary.