Bonnie Smith
HCMT 320-40: Health Finance & Economics
Assignment 1-1 (Revenue, Expenses, and Cost Classification
Due: August 6, 2015

1. List and describe contractual allowances and other deductions from revenue. How do they impact an organization's bottom line? Contractual allowances are the difference between the full-established rates an organization charges for the services it renders, and the agreed-upon contractual rate that has been negotiated between them and the payer of those services. For example, if a healthcare facility charges $200 for a chest x-ray, but they have a managed care contract with Cigna Insurance Co., where the plan pays only $150 for chest x-rays. The $50 difference between the facilities full-established rate of $200 and the agreed upon contractual rate of $150 would represent the contractual allowance. In addition, it is common for different plans (payers) to pay different contractual rates for the same services (Baker, 2014, pp. 32-33). Beyond contractual allowances, another major deduction from revenue is an allowance for bad debt (provision for doubtful accounts). “The allowance for bad debts is charged with the amount of services received on credit (recorded as accounts receivable), that are estimated to result in credit loses” (Baker, 2014, p. 33). The third major deduction from revenue is charity services – defined as services a healthcare facility has provided to financially indigent patients (Baker, 2014, p. 33). Contractual allowances and the other deductions from revenue listed above are classifications used in the books and records for internal management. For the purposes of the external financial statement released for third-party use, the terms gross revenue and deductions from revenue will not be seen (Baker, 2014, p. 32). 2. From a cost perspective, what are expenses considered to be?
Expenses are the