Contractual allowances in healthcare

hello everyone my name is Sally and this

is a brief presentation about

contractual allowances in healthcare by

the end of this video you'll be able to

understand and calculate contractual

allowances in order to find the net

revenue and understanding calculate

contractual allowances percentage in

order to analyze the company's financial

condition so what are contractual

allowances there are simply the

difference between two rates with the

healthcare organization or the physician

charges for the healthcare services they

provide and they call that the full

established rate and with the insurance

company actually agrees to pay and they

call that the contractual rate it's

called the contractual rate because

there has to be a contract between the

payer and the provider so it's actually

rare for the providers to receive the

prices they established for their

services these prices can be found in

what is called the charge master now we

might be wondering who pays the

difference is it the patient actually

nobody based a difference or maybe you

can think about it as the provider does

because it's considered a revenue loss

for the provider or for the healthcare

organization so you have to keep in mind

that the contractual allowances are only

made on services covered by the

insurance company so if you are

uninsured or your insurance company does

not cover a certain procedures or

services that means you have to pay the

full established rate that's why you

might hear some people saying doctors

charges more for people who are

uninsured and insured people

well contractual rate actually explains

why this might be correct sometimes

insurance companies have negotiating

powers so in exchange for volume they

negotiate lower prices with the

providers another thing to keep in mind

is that different healthcare plans have

different contractual rates for the

exact same procedure

you are now probably able to identify

who are the stakeholders first patients

payers that can include insurance

companies or the government through

Medicare or Medicaid program and the

providers themselves so so the benefits

for the patients and the payers is lower

cost and for providers that effect

actually as we explained would be lower

profit and to explain exactly how

contractual allowances affect providers

let's talk about contractual allowance

percentage which equal to contractual

allowance divided by gross patient

revenue times a hundred so the bigger

this percentage is the lower the profit

and this number these numbers you can

explain what I mean by that let's say

your contractual allowance percentage in

the first case is ten percent in the

second case is twenty percent 10 percent

of 1 million would be a hundred thousand

twenty percent of 1 million would be two

hundred thousand to find your net

revenue you have to subtract contractual

allowances from gross revenue you will

end up with nine hundred thousand if

your contractual allowance percentage is

ten percent and you end up with eight

hundred thousand if your contractual

allowance percentage is twenty percent

notice that the higher the percentage

the lower your net revenue and the lower

your profit is a real-world example of

that is this article which explains how

rising contractual adjustments drag on

profit at the Magnolia Regional Medical

Center so the medical center they

reported the gross revenue for the

fiscal year of 2017 to be fifty point

three million dollars which is more than

their gross revenue in the 2016 fiscal

year which is forty eight point eight

million dollars despite the increase in

gross revenue the Medical Center

actually ended the fiscal year of 2017

with an operating losses of three point

three million dollars which is a point

five million which is a half million

increase compared to the 2016

year so the hospital partially

attributed the operating loss to growth

in average contractual adjustments by

two point one percent from 2016 to 2017

so a small increase in the percentage

increase the operating losses and lower

the hospital's profit okay so we want

over contractual allowances and

contractual allowances percentage now

you're able to calculate them and you

understand the concept behind each one

and we also explains who are the

stakeholders what is the effect on each

of them we explain the effect on the

providers using the real world example

of the Magnolia Regional Medical Center

thank you for watching for more

information contact me via LinkedIn