One important thing that should be remembered about contractual accommodation is that they are only covered on services by the insurance company. This means that a patient who needs a specific medical benefit that the insurance company does not support will ultimately pay the full amount that the doctor, without contractual adjustment, will charge to limit costs. In order to ensure a correct tax return, suppliers should make separate line entries for contractual certificates and debt premiums when producing financial information. When obtaining net receivables, the accounting plan should include accounts for gross receivables, contractual allowances and certificates of default. When obtaining net revenues for patient services, the account plan`s profit and loss accounts should include accounts for gross patient service revenues, contractual allowances and deficit expenses. To illustrate contractual compensation and claims, you agree in this example that the ABC hospital treats outpatient patients covered by health insurance at XYZ Insurance on the same day. Once the procedure is complete, ABC Hospital XYZ Insurance Co. charges US$8,000 for the value of Patient A. In accordance with the terms of the contract/agreement between ABC and XYZ, the agreed amount, which should ultimately be reimbursed at the ABC Hospital, is $5,000. The difference of $3,000 is a contractual supplement.
Now, suppose patient A is responsible for paying the full $5,000 because they are not yet fulfilling their annual deductible. Based on historical trends in real patient cash collection, ABC Hospital estimates that 20% of these exceptional A/Rs are unrecoverable. This estimate of 1,000 USD (5,000 usd x 20%) represents a deficit. While the value of the service provided by ABC Hospital is US$8,000, the estimated cash collection is only $4,000. Contractual allowances, also known as contractual adjustments, are the difference between what a health care provider charges for the service provided and what it should pay (or be paid for) based on the terms of its contracts with third-party insurers and/or government programs. Often, the amount of restitution is less than the amount charged. An example of contractual adjustment is that a provider charges a practice fee for a particular service of $100. The contractual rate between the insurance company and the provider of this service is $80, the insurer pays $64 or 80% and the remaining 20% of the contract rate is paid by the patient. The $20 difference between the $100 billed by the provider and the $80 collected is adjusted by the patient`s account as a contractual adjustment. A contractual adjustment is in part a patient`s bill that a doctor or hospital must pay under billing agreements with the insurance company (no fees).
Adjustments or depreciations are dollars that, for whatever reason, are adjusted by a patient account. Contractual adjustment is the most common form of adjustment. As noted above, contractual and non-performing debt allowances are similar in that they are cash that is likely not recovered. However, they are fundamentally distinguished by the fact that conventional allowances are adjustments in gross revenues on the basis of genuine contractual agreements between service providers and government insurers/programs, while laziness premiums are estimates of uncreative net revenue based on historical trends in patient/payer payment.