McKesson has worked with physicians for more than 40 years, and among our observations is that physicians don’t like surprises — especially ones that have an adverse effect on their practice and finances. “Forewarned is forearmed” is their mantra. One typical, unpleasant surprise occurs when “actual” group revenues lag substantially behind “expected” collections. 

Therefore, group practice managers would be well-advised to conduct a detailed revenue forecast annually. Unfortunately, some practice managers derive at the “expected” level of collections either per month or per annum with a simple calculation: apply the historical gross collection percent (GCR), defined as net payments divided by gross charges, to the current levels of gross charges. This logic is faulty and will often create a disconnect between physician expectations and actual collection performance, resulting in negative “surprises.” 

Conducting an Annual Revenue Forecast

McKesson strongly recommends that near the beginning of each year, groups conduct a detailed revenue forecast. Some group practice managers may be able to create this forecast themselves, or it may be better to hire an experienced third-party as part of the more comprehensive review of the entire practice.

The mere process of preparing for the forecast will yield certain benefits, including assurance that all current fee schedules for both commercial and governmental payers are available.
To get started, perform these three steps:

Step 1 – Data Gathering

Before the analyses to determine an expected annual revenue figure can be performed, the following reports should be generated:

Payer mix report
A report detailing the level of charges, procedures and payments billed to each payer for the prior year. This report should be as detailed as possible. For example:

  • Each contracted commercial payer should be depicted separately, and if these commercial payers have multiple fee schedules (e.g., PPO vs. HMO), then those products should be reported separately. A report that lumps all contracted commercial payers into general categories such as “HMO,” and “PPO,” is not useful.
  • Each Medicare Advantage (MA) and Medicaid HMO plan should ideally be listed separately (e.g., Aetna Medicare) since a) not all MA plans apply the 2% sequestration payment reductions, b) it’s possible that not all MA plans reimburse based on 100% of the current-year Medicare fee schedule and c) not all Medicaid HMO plans reimburse based on 100% of that state’s current Medicaid fee schedule. Alternatively, but not ideal, MA and Medicaid HMO plans can be aggregated into just two categories. 

Unfortunately, some billing entities continue to lump all commercial and governmental volumes into one category (e.g., Aetna), which can distort the outcome of a revenue estimate unless some level of manual manipulation occurs. For example, if a group’s payer mix indicates that Aetna is 5% of total volumes but 10% of these Aetna volumes are related to Aetna’s MA product(s), then Aetna’s forecasted revenue would be overstated unless these MA volumes are stripped out of the general Aetna category.

Given the value of a detailed and accurate payer mix report, groups should map each major commercial and governmental payer to their own specific financial class or category to avoid manual manipulations during the actual forecasting process. 

Payer matrix:
This summary typically includes, but is not limited to, the following:

  • Name of payer
  • Contracting representative
  • Effective date
  • Term of contract and termination provisions
  • Timely filing deadlines
  • Terms of reimbursement, by product

Miscellaneous payment adjustmentsreport (e.g., multiple-procedure reductions)

Charge master

Gross collection percent by payer (most importantly for self-pay and smaller miscellaneous commercial payers) 

Additionally, the integrity of the revenue forecast is enhanced with some general understanding of the level of co-share amounts for each major commercial payer (e.g., 90/10, 80/20, 70/30). That is, the higher the amount of the total allowed amount for which the patient is responsible, one could safely assume this will reduce the overall level of collectability.

Step 2 – Analysis

Once the data gathering is complete, the analysis can begin by creating a spreadsheet similar to the one shown here:

Sample Practice
2015 Revenue Forecast

Revenue Forcast1

The calculation of the “Expected Gross Collection Percent” begins with a comparison of the group’s charge for each top-volume procedure code to the allowed amount for that same code. For example:

Revenue Forecast 2

After completing these calculations for about the top 90%of the group’s procedure codes, the Expected Gross Collection Percent in this example is total Medicaid fees divided by total Group fees. 

The Adjusted Gross Collection Percent is determined by applying certain reasonable assumptions to each payer’s expected collection percent including, but not limited to:

  • The 2% sequestration reduction for Medicare (but only on the typical 80% amount from Medicare) and for certain, but not all, Medicare MA plans
  • Any multiple procedure reductions
  • Any payer withholds
  • The reasonable amount the group can expect to collect from the patient, including deductibles and co-insurance responsibilities
  • Actual collection percents for true self-pay patients and miscellaneous commercial payers

The Weighted Gross Collection Percent is merely the product of that payer’s percent of total volumes times the Adjusted Gross Collection Percent. 

After the above calculations are completed, the total Weighted Gross Collection Percent can be applied to prior year gross charges to yield projected annual expected net collections.

Step 3 – Ongoing Adjustments

Of course, no practice is immune to constant change that is typical in today’s healthcare industry.  Therefore, to meet the revenue expectations of the group, alterations to the initial revenue forecast should be made, when necessary. You will want to watch for the more significant changes affecting group revenues such as:

  • Changes in payer fee schedules
  • Changes in payer reimbursement policies (e.g., bundling, payable diagnoses)
  • Temporary or permanent payer decisions to cover/not cover new technologies
  • Changes in insurance products at varying fee schedules (e.g., Exchange products)
  • Changes in payer mix (e.g., Medicaid expansion and perhaps less self pay)
  • Changes in the deductible levels in benefit plans
  • Changes in the mix of services typically provided by the group
  • Changes in group volumes (e.g., new service locations, new service lines, loss of key referring physicians, infringement of group’s services by other specialties)
  • Hospital disputes with payers resulting in temporary/permanent volume decreases
  • Competing hospital disputes with payers resulting in temporary/permanent volume increases
  • Hospital being included/excluded in a payer’s “narrow network”
  • Changes in the group’s charge master
  • Credentialing/Enrollment issues
  • Problems with demographic/charge interfaces with facilities
  • Problems with the group’s billing office/vendor’s performance
  • Implementation of new coding conventions (e.g., ICD-10)
  • Atypical inclement weather patterns


Engaging in the three-step process delivers two key benefits: your group’s management team will be forced to review all variables incorporated into the revenue-forecasting process, and your group can constantly adjust their expectations regarding group revenues. With all the uncertainty in today’s brave new world of healthcare reform, groups should attempt to predict at least one major aspect of their group practice — annual revenues. 

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About the author

Rob Saunders, MHS is a Senior Consultant of McKesson Business Performance Services. Saunders specializes in client service for radiology, anesthesiology and pathology groups. He with a focuses on financial and strategic analyses and facilitates group mergers – negotiating exclusive contracts with hospitals, conducting practice reviews and feasibility studies, fee analyses, revenue forecasting, and managed care reviews. Saunders has been with McKesson for more than 20 years and has served in various roles including Regional director Director of Client Services and Director of Client Development.