Unlike other industries, healthcare providers work with a large volume of patients from multiple parties when it comes to the billing process. Agreements and interactions with these third parties impact the actual amount of cash collected which in turn creates difficulty in balancing anticipated revenues. For providers, estimating income continues to be a challenge.  

Most healthcare providers usually take into consideration two different categories when figuring out actual collections – contractual allowances and bad debt allowances.

What is contractual allowance adjustment?

First, what is a contractual allowance? Contractual allowances, also known as contractual adjustments, are the difference between what a healthcare provider bills for the service rendered versus what it will contractually be paid (or should be paid) based on the terms of its contracts with third-party insurers and/or government programs.

What is bad debt allowance?

Bad debt allowances are usually an estimate on what the patient or other payor cannot or will not pay for their portion of the bill. This is also known as uncompensated care. Sometimes bad debt allowances are reported as what was billed to the patient versus what the patient actually paid.

What’s the difference between contractual allowance and bad debt allowance?

To demonstrate how the whole process works here’s an example: Let’s say Hospital A does a procedure on Patient A who has ABC Insurance Co. Once the procedure is done, Hospital A will bill ABC Insurance Co. for $5,000. Because of the agreement between Hospital A and ABC Insurance Co., $2,500 should be reimbursed to Hospital A. The $2,500 difference is what we call the contractual allowance. However, if Patient A has not met their annual deductible, they would be responsible for paying the whole $2,500. Hospital A estimates that based on cash collection trends in the past, that 20% of the outstanding total accounts receivable will be uncollectible. The 20% of the $2,500 estimate ($500) is what we call the bad debt allowance. All this means that while the services provided by Hospital A value at $5,000, the estimated cash collection is only $2,000.

Why choose Credence Global Solutions?

Credence Global Solutions provides end-to-end revenue cycle management and patient financial engagement tools to increase collections and time spent on collections.