A hospital entered into a retrospective billing arrangement with a third-party payer,calling for interim billing rates,subject to final settlement after the year's end.Final settlement was to be based on the hospital's submission of costs and audit by the third-party payer.During the year,the hospital provided services to patients covered by this third party,billing for $4.8 million at the hospital's established rates.However,the hospital's services at the interim billing rates were 25 percent less than the established rates.Before issuing its financial statements for the year,the hospital analyzed its costs and estimated that the rates charged to the third-party payer were $300,000 too high.For this third party,how much was the total contractual adjustment for the year?

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The total contractual adjustment is the difference between the amount billed at the established rates and the amount that should have been billed at the interim billing rates, plus the amount by which the rates charged to the third-party payer were too high.Amount billed at established rates: $4.8 millionAmount that should have been billed at interim billing rates: $4.8 million x 75% = $3.6 millionDifference: $4.8 million - $3.6 million = $1.2 millionAmount by which rates charged to third-party payer were too high: $300,000Total contractual adjustment: $1.2 million + $300,000 = $1.5 million

A Hospital Entered into a Retrospective Billing Arrangement with a Third-Party