Planning for Practice

Example 4A: Contractual Allowances

Contractual 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).461462

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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
70.75
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

Example 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) 462463

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 Contracts

(1)