National Association of Boards of Long Term Care Administrator (NAB) CORE Practice Exam

What term describes the difference in funds between full charges and the amount actually paid by a third-party payer?

1. Expense allowances

2. Deductions from revenue

3. Contractual allowances

4. Revenue write-off

The correct answer is: Contractual allowances

The term that describes the difference in funds between full charges and the amount actually paid by a third-party payer is known as contractual allowances. This concept refers specifically to the negotiated agreements between healthcare providers and payers, such as insurance companies or government programs, which often stipulate a lower payment amount than the provider's charged rate. When a provider submits a claim for payment, the full charges may be higher, but due to these contracts, the payer only reimburses a predetermined amount. The difference between the billed charges and the negotiated payment amount is recognized as a contractual allowance, reflecting a reduction in expected revenue. This terminology is crucial in financial reporting and helps organizations accurately track revenue performance and set financial strategies. Understanding contractual allowances is fundamental for professionals in healthcare finance, as it ties directly into budgeting, forecasting, and analyzing the financial health of long-term care facilities.