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Attention Kim Woods

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:


Contracted Rate





















Rates for illustration only.


  • 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:



















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)


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.


  • 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:




    Other Public Programs


    Commercial Insurance

    Managed Care Contracts












































Example 5A: Grouping Expenses by Cost Center

Cost centers are one method of grouping expenses. For example, a nursing home may consider the Admitting department as a cost center. In that case the expenses grouped under the Admitting department cost center may include:

  • Administrative and Clerical Salaries
  • Admitting Supplies
  • Dues
  • Periodicals and Books
  • Employee Education
  • Purchased Maintenance

Practice Exercise 5–I: Grouping Expenses by Cost Center

The Metropolis Health System groups expenses for the Intensive Care Unit into its own cost center. Laboratory expenses and Laundry expenses are likewise grouped into their own cost centers.


  • 1. Set up a worksheet with individual columns across the top for the three cost centers: Intensive Care Unit, Laboratory, and Laundry.
  • 2. Indicate the appropriate cost center for each of the following expenses:
    • Drugs Requisitioned
    • Pathology Supplies
    • Detergents and Bleach
    • Nursing Salaries
    • Clerical Salaries
    • Uniforms (for Laundry Aides)
    • Repairs (parts for microscopes)
    (Hint: One of the expenses will apply to more than one cost center.)

Headings for your worksheet:

Intensive Care Unit      Laboratory      Laundry

Assignment Exercise 5–1: Grouping Expenses by Cost Center

The Metropolis Health System’s Rehabilitation and Wellness Center offers outpatient therapy and return-to-work services plus cardiac and pulmonary rehabilitation to get people back to a normal way of living. The Rehabilitation and Wellness Center expenses include the following:

  • Nursing Salaries
  • Physical Therapist Salaries
  • Occupational Therapist Salaries
  • Cardiac Rehab Salaries
  • Pulmonary Rehab Salaries
  • Patient Education Coordinator Salary
  • Nursing Supplies
  • Physical Therapist Supplies
  • Occupational Therapist Supplies
  • Cardiac Rehab Supplies
  • Pulmonary Rehab Supplies
  • Training Supplies
  • Clerical Office Supplies
  • Employee Education


  • 1. Decide how many cost centers should be used for the above expenses at the Rehabilitation and Wellness Center.
  • 2. Set up a worksheet with individual columns across the top for the cost centers you have chosen.
  • 3. For each of the expenses listed above, indicate to which of your cost centers it should be assigned.

Example 5B

Study the chapter text concerning grouping expenses by diagnoses and procedures. Refer to Exhibits 5–3 and 5–4 (about major diagnostic categories), Exhibit 5–5 (about DRGs and MDCs), and Table 5–1 (about procedure codes) for examples of different ways to group expenses by diagnoses and procedures.

Assignment Exercise 5–2


Find a listing of expenses by diagnosis or by procedure. The source of the list can be internal (within a healthcare facility of some type) or external (such as a published article, report, or survey). Comment upon whether you believe the expense grouping used is appropriate. Would you have grouped the expenses in another way?

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