Contractual Allowances
Example 4A: Contractual Allowances
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Order Paper NowContractual allowances represent the difference between the full established rate and the agreed-upon contractual rate that will be paid. An example was given in the text of Chapter 4 by which the hospital’s full established rate for a certain procedure is $100, but Giant Health Plan has negotiated a managed care contract whereby the plan pays only $90 for that procedure. The contractual allowance is $10 ($100 less $90 = $10). Assume instead that Near-By Health Plan has negotiated its own managed care contract whereby this plan pays $95 for that procedure. In this case the contractual allowance is $5 ($100 less $95 = $5).
Assignment Exercise 4–1: Contractual Allowances
Physician office revenue for visit code 99214 has a full established rate of $72.00. Of 10 different payers, there are 9 different contracted rates, as follows:
| Payer Contracted Rate |
| FHP $35.70 |
| HPHP 58.85 |
| MC 54.90 |
| UND 60.40 |
| CCN 70.20 |
| MO 70.72 |
| CGN 10.00 |
| PRU 54.90 |
| PHCS 50.00 |
| ANA 45.00 |
| Rates for illustration only: |
Required
1. Set up a worksheet with four columns: Payer, Full Rate, Contracted Rate, and Contractual Allowance.
2. For each payer, enter the full rate and the contracted rate.
3. For each payer, compute the contractual allowance.
The first payer has been computed below:
| Full Contracted Contractual |
| Payer Rate (less) Rate (equals) Allowance |
| FHP $72.00 $35.70 $36.30 |
4B: Revenue Sources and Grouping Revenue
Sources of healthcare revenue are often grouped by payer. Thus, services might be grouped as follows:
Revenue from the Medicare Program (payer = Medicare)
Revenue from the Medicaid Program (payer = Medicaid)
Revenue from Blue Cross Blue Shield (payer = Commercial Insurance)
Or
Revenue from Blue Cross Blue Shield (payer = Managed Care Contract)
Assignment Exercise 4–2: Revenue Sources and Grouping Revenue
The Metropolis Health System (MHS) has revenue sources from operations, donations, and interest income. The revenue from operations is primarily received for services. MHS groups its revenue first by cost center. Within each cost center the services revenue is then grouped by payer.
Required
1. Set up a worksheet with individual columns across the top for six revenue sources (payers): Medicare, Medicaid, Other Public Programs, Patients, Commercial Insurance, and Managed Care Contracts.
2. Certain situations concerning the Intensive Care Unit and the Laboratory are described below.
Set up six vertical line items on your worksheet, numbered 1 through 6. Six situations are described below. For each of the six situations, indicate its number (1 through 6) and enter the appropriate cost center (either Intensive Care Unit or Laboratory). Then place an X in the column(s) that represents the correct revenue source(s) for the item. The six situations are as follows:
(1) ICU stay billed to employee’s insurance program.
(2) Lab test paid for by an individual.
(3) Pathology work performed for the state.
(4) ICU stay billed to member’s health plan.
(5) ICU stay billed for Medicare beneficiary.
(6) Series of allergy tests run for eligible Medicaid beneficiary.
Headings for your worksheet:
| Medicare | Medicaid | Other Public Programs | Patients | Commercial Insurance | Managed Care Contacts | |
| (1) | ||||||
| (2) | ||||||
| (3) | ||||||
| (4) | ||||||
| (5) | ||||||
| (6) |
Example 5A: Grouping Expenses by Cost Center
Cost centers are one method of grouping expenses. For example, a nursing home may consider the Admitting department as a cost center. In that case the expenses grouped under the Admitting department cost center may include:
• Administrative and Clerical Salaries
• Admitting Supplies
• Dues
• Periodicals and Books
• Employee Education
• Purchased Maintenance
Practice Exercise 5–I: Grouping Expenses by Cost Center
The Metropolis Health System groups expenses for the Intensive Care Unit into its own cost center. Laboratory expenses and Laundry expenses are likewise grouped into their own cost centers.
Required
1. Set up a worksheet with individual columns across the top for the three cost centers: Intensive Care Unit, Laboratory, and Laundry.
2. Indicate the appropriate cost center for each of the following expenses:
• Drugs Requisitioned
• Pathology Supplies
• Detergents and Bleach
• Nursing Salaries
• Clerical Salaries
• Uniforms (for Laundry Aides)
• Repairs (parts for microscopes)
(Hint: One of the expenses will apply to more than one cost center.)
Headings for your worksheet:
Assignment Exercise 5–1: Grouping Expenses by Cost Center
The Metropolis Health System’s Rehabilitation and Wellness Center offers outpatient therapy and return-to-work services plus cardiac and pulmonary rehabilitation to get people back to a normal way of living. The Rehabilitation and Wellness Center expenses include the following:
• Nursing Salaries
• Physical Therapist Salaries
• Occupational Therapist Salaries
• Cardiac Rehab Salaries
• Pulmonary Rehab Salaries
• Patient Education Coordinator Salary
• Nursing Supplies
• Physical Therapist Supplies
• Occupational Therapist Supplies
• Cardiac Rehab Supplies
• Pulmonary Rehab Supplies
• Training Supplies
• Clerical Office Supplies
• Employee Education
Required
1. Decide how many cost centers should be used for the above expenses at the Rehabilitation and Wellness Center.
2. Set up a worksheet with individual columns across the top for the cost centers you have chosen.
3. For each of the expenses listed above, indicate to which of your cost centers it should be assigned.
Example 5B
Study the chapter text concerning grouping expenses by diagnoses and procedures. Refer to Exhibits 5–3 and 5–4 (about major diagnostic categories), Exhibit 5–5 (about DRGs and MDCs), and Table 5–1 (about procedure codes) for examples of different ways to group expenses by diagnoses and procedures.
Assignment Exercise 5–2
Required
Find a listing of expenses by diagnosis or by procedure. The source of the list can be internal (within a healthcare facility of some type) or external (such as a published article, report, or survey). Comment upon whether you believe the expense grouping used is appropriate. Would you have grouped the expenses in another way?
Exhibit 5–3 Major Diagnostic Categories
| MDC 1 Diseases and Disorders of the Nervous System |
| MDC 2 Eye |
| MDC 3 Ear, Nose, Mouth, and Throat |
| MDC 4 Respiratory System |
| MDC 5 Circulatory System |
| MDC 6 Digestive System |
| MDC 7 Hepatobiliary System and Pancreas |
| MDC 8 Musculoskeletal System and Connective Tissue |
| MDC 9 Skin, Subcutaneous Tissue, and Breast |
| MDC 10 Endocrine, Nutritional, and Metabolic |
| MDC 11 Kidney and Urinary Tract |
| MDC 12 Male Reproductive System |
| MDC 13 Female Reproductive System |
| MDC 14 Pregnancy, Childbirth, and the Puerperium |
| MDC 15 Newborns and Other Neonates with Conditions Originating in the Perinatal Period |
| MDC 16 Blood and Blood-Forming Organs and Immunological Disorders |
| MDC 17 Myeloproliferative and Poorly and Differentiated Neoplasms |
| MDC 18 Infections and Parasitic Diseases (Systemic or Unspecified Sites) |
| MDC 19 Mental Diseases and Disorders |
| MDC 20 Alcohol/Drug Use and Alcohol/Drug-Induced Organic Mental Disorders |
| MDC 21 Injuries, Poisoning, and Toxic Effect of Drugs |
| MDC 22 Burns |
| MDC 23 Factors Influencing Health Status and Other Contacts with Health Services |
Exhibit 5–4 Hospital Departmental Code List Based on Major Diagnostic Categories
| 1 Nervous System |
| 2 Eye |
| 3 Ear, Nose, Mouth, and Throat |
| 4 Respiratory System |
| 5 Circulatory System |
| 6 Digestive System |
| 7 Hepatobiliary System |
| 8 Musculoskeletal System and Connective Tissue |
| 9 Skin, Subcutaneous Tissue, and Breast |
| 10 Endocrine, Nutritional, and Metabolic |
| 11 Kidney and Urinary Tract |
| 12 Male Reproductive System |
| 13 Female Reproductive System |
| 14 Obstetrics |
| 15 Newborns |
| 16 Immunology |
| 17 Oncology |
| 18 Infectious Diseases |
| 19 Mental Diseases |
| 20 Substance Use |
| 21 Injury, Poison, and Toxin |
| 22 Burns |
| 23 Other Health Services |
| 24 Special Drugs |
| 25 HIV |
| 26 Unassigned |
| 59 Outpatient |
Exhibit 5–5 Example of Hospital Departmental Costs Classified by Diagnoses, MDC, and DRG
| Hospital Departmental Code DRG Description Cost |
| 18 INFECTIOUS DISEASES 415 O/R—INFECT/PARASITIC DIS 4,000 |
| 18 INFECTIOUS DISEASES 416 SEPTICEMIA 17 10,000 |
| 18 INFECTIOUS DISEASES 417 SEPTICEMIA 0–17 20,000 |
| 18 INFECTIOUS DISEASES 418 POSTOP/POSTTRAUMA INFECT 2,000 |
| 18 INFECTIOUS DISEASES 419 FEVER—UKN ORIG 17W/C 3,000 |
| 18 INFECTIOUS DISEASES 420 FEVER—UKN ORIG 17W/OC 6,000 |
| 18 INFECTIOUS DISEASES 421 VIRAL ILLNESS 17 4,000 |
| 18 INFECTIOUS DISEASES 422 VIR ILL/FEVER UNK 0–17 1,000 |
| 18 INFECTIOUS DISEASES 423 OT/INFECT/PARASITIC DX 3,000 |
Exhibit 5–5 Example of Hospital Departmental Costs Classified by Diagnoses, MDC, and DRG
| Procedure Code Procedure Description Department Cost |
| 557210 Ribs, Unilateral $ 60,000 |
| 557230 Spine Cervical Routine 125,000 |
| 557280 Pelvis 33,000 |
| 557320 Limb—Shoulder 55,000 |
| 57360 Limb—Wrist 69,000 |
| 557400 Limb—Hip, Unilateral 42,000 |
| 557410 Limb—Hip, Bilateral 14,000 |
| 557430 Limb—Knee Only 62,000 |
| Total $460,000 |
Assignment Exercise 5–2
Required
Find a listing of expenses by diagnosis or by procedure. The source of the list can be internal (within a healthcare facility of some type) or external (such as a published article, report, or survey). Comment upon whether you believe the expense grouping used is appropriate. Would you have grouped the expenses in another way?
