From $64 Million in Charges to $20.4 Million in Revenue: Contractual Allowances, Charity Care and Implicit Price Concessions in One Hospital's Month
[Student Name]
University of Phoenix
HCS/380: Health Care Accounting
Week 2 Assignment
[Instructor Name]
[Date]
The hospital and all figures are a composite written for a model paper.
A composite 260-bed nonprofit hospital billed $64.0 million in gross charges in October, the full chargemaster price for every service it provided. Yet the finance office will record only about $20.4 million in net patient service revenue for the month. The difference is not lost money in the usual sense: most of it was never expected to be paid. A hospital's charges are closer to a list price that almost no one pays than to the amount the hospital actually expects to receive. This paper explains how the hospital gets from charges to revenue and why it matters.
Why Charges Are Not Revenue
Hospitals maintain a chargemaster, a list of prices for thousands of services. But most patients are covered by payers who pay set amounts: Medicare pays according to its prospective payment systems, Medicaid according to state rates, and commercial insurers according to negotiated contracts. Uninsured patients may qualify for financial assistance. Under generally accepted accounting principles, revenue is reported at the amount the hospital expects to be entitled to receive in exchange for its services, not at gross charges (Financial Accounting Standards Board [FASB], 2014). Gross charges are recorded internally, but the deductions below are made before revenue appears on the income statement (Pink & Song, 2020).
The Month, Payer by Payer
The hospital's October charges and expected payments were as follows.
Medicare patients accounted for $26.88 million in charges, 42% of the total. Based on the diagnosis-related groups and outpatient payment rates for the services provided, the hospital expects to receive $7.80 million. The difference, $19.08 million, is a contractual allowance.
Medicaid patients accounted for $11.52 million in charges. At state rates, the hospital expects $2.65 million, a contractual allowance of $8.87 million.
Commercially insured patients accounted for $20.48 million in charges. Under its negotiated contracts, which pay on average about 46% of charges, the hospital expects $9.42 million, a contractual allowance of $11.06 million.
Uninsured patients accounted for $5.12 million in charges. Of this, $1.40 million was for patients who qualified for free or discounted care under the hospital's financial assistance policy; that is charity care. The remaining $3.72 million was billed to patients, but based on its history, the hospital expects to collect only about 15%, or $558,000.
The Three Deductions
Contractual allowances total $19.08 million plus $8.87 million plus $11.06 million, or $39.01 million. They reflect the difference between the chargemaster and the payment terms the hospital accepted.
Charity care of $1.40 million is not revenue at all. The hospital decided not to charge these patients, so no revenue or receivable is recorded. It is disclosed in the notes to the financial statements, usually measured at cost rather than charges.
Implicit price concessions of $3.16 million are the difference between the $3.72 million billed to uninsured patients who did not qualify for charity care and the $558,000 the hospital expects to collect. Under the revenue recognition standard that took effect for hospitals in 2018, when a hospital provides care knowing it will likely accept less than the billed amount, the expected shortfall is treated as a reduction in revenue, an implicit price concession, rather than as bad debt expense (FASB, 2014). Bad debt expense is now limited to cases where a patient's ability to pay changes after the service, such as a bankruptcy.
Net patient service revenue is therefore $64.0 million minus $39.01 million minus $1.40 million minus $3.16 million, or about $20.43 million, about 32% of gross charges.
The Journal Entries
The hospital records revenue at the expected amount. A summary entry for the month debits patient accounts receivable and credits net patient service revenue for $20.43 million. Many hospitals first record gross charges and then record contractual allowances and price concessions as contra-revenue accounts, which produces the same net result while keeping gross charges visible for management reporting.
Estimates are revised when payments arrive. In December, one commercial insurer's payments for October services came in $120,000 below the estimate because of a contract term the billing system had not applied. The hospital debits net patient service revenue and credits patient accounts receivable for $120,000, a change in estimate recorded in the period it is identified.
Keeping the Estimates Honest
Because net revenue depends on estimates, the hospital tests them. Each quarter, the finance office compares the amounts actually collected for each payer group with what was estimated when the services were recorded, a process often called a lookback. If collections consistently fall short, the estimation rates are lowered. The external auditors examine the same comparison, since overstated revenue estimates are one of the most common ways a hospital's reported results can be wrong without anyone intending it.
Why the Distinctions Matter
The distinctions are not just technical. First, for managers, net revenue, not charges, is what pays salaries and supplies; a department that reports rising charges may be bringing in little additional revenue if its payer mix is shifting toward Medicaid or the uninsured. Budgets and performance reports should therefore use net revenue.
Second, for the public, the line between charity care and collection from uninsured patients matters. Nonprofit hospitals report charity care as part of the community benefit that justifies their tax exemption. State policy can change how hospitals sort uninsured patients between charity and collection: Santos et al. (2025) studied Oregon's community benefit reform and found that it influenced how much not-for-profit hospitals provided as charity care and how much patient debt they wrote off. A hospital that screens uninsured patients carefully for financial assistance records more charity care and pursues fewer patients for bills they cannot pay.
Third, charity care reported at charges would overstate its value. Applying the hospital's cost-to-charge ratio of about 0.30 to the $1.40 million in charity charges gives a cost of about $420,000, which is the figure that belongs in community benefit reports.
Conclusion
In one month, a composite hospital billed $64.0 million and recorded about $20.4 million in revenue. The gap reflects $39.0 million in contractual allowances, $1.4 million in charity care and $3.2 million in implicit price concessions. Revenue is recorded at what the hospital expects to be paid, and it is adjusted as payments reveal better information. Understanding these deductions helps managers read their reports correctly and helps the public judge what hospitals give back to their communities.
References
Financial Accounting Standards Board. (2014). Revenue from contracts with customers (Topic 606) (Accounting Standards Update No. 2014-09).
Pink, G. H., & Song, P. H. (2020). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.
Santos, T., Lindrooth, R. C., Lee, S.-Y. D., Owsley, K., & Young, G. J. (2025). Oregon community benefit reform influenced not-for-profit hospitals' charity care and medical debt write-off. Health Affairs, 44(2), 196-205. https://doi.org/10.1377/hlthaff.2024.00760
How this HCS 380 Week 2 example is structured
The HCS/380 shelf page offers a custom sample for the Week 2 deliverable, and a common Week 2 topic in health care accounting is how revenue is measured and recorded. The paper follows one month of charges from the chargemaster to the income statement, because the gap between charges and revenue is the concept students find hardest. Each deduction is calculated in the text, the journal entries are shown and the final sections explain what the numbers mean outside the accounting office. Students search this week as HCS 380 Week 2, HCS380 Wk 2 or HCS/380 Wk 2; all three are the same assignment.
HCS/380 Week 2 questions, answered
What might HCS/380 Week 2 ask for?
Many HCS/380 sections spend the early weeks on health care financial statements and how revenue is measured. Assignments often ask students to explain or calculate net patient revenue, contractual allowances and related items for a health care organization. Your own instructions set the exact task.
What is a contractual allowance?
The difference between a provider's full charge for a service and the amount a payer has agreed to pay under its contract or payment system. It is not revenue the hospital expected to receive, so it is deducted from gross charges before revenue is reported.
How is charity care different from bad debt?
Charity care is care the hospital decides in advance, under its financial assistance policy, not to charge for, so it is never recorded as revenue. Bad debt, or under current standards mostly implicit price concessions, arises when the hospital bills a patient and expects or later finds that it will not collect.
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