For a medical practice, it's important to distinguish between what you bill and what you actually expect to earn. Gross charges are often based on a fee schedule, while insurance contracts determine the amount you'll actually receive. The accounting system should make that distinction clear.
A common chart of accounts structure looks like this:
| Account | Type | Purpose |
|---|
| Gross Patient Service Revenue (Charges) | Revenue | Records all charges at the practice's standard fee schedule. |
| Contractual Adjustments | Contra-Revenue | Reduces gross charges to the amount allowed by payer contracts. |
| Charity Care (if applicable) | Contra-Revenue | Tracks approved charity write-offs separately from insurance adjustments. |
| Bad Debt Expense (or Credit Loss Expense) | Expense | Records amounts expected to be uncollectible after services are provided, depending on your accounting policy. |
| Net Patient Service Revenue | Reported total | Usually not a separate posting account—it's Gross Revenue less Contra-Revenue. |
Example
Suppose you perform a procedure with:
- Standard charge: $2,000
- Insurance contract allows: $850
- Patient responsibility: $150
- Total expected collections: $1,000
The accounting entries under a gross-charge system might be:
When charges are posted
- Debit Accounts Receivable: $2,000
- Credit Gross Patient Service Revenue: $2,000
Record the contractual adjustment
- Debit Contractual Adjustments (Contra-Revenue): $1,000
- Credit Accounts Receivable: $1,000
Now your receivable is $1,000, which matches what you expect to collect.
If payment is later received:
- Debit Cash: $1,000
- Credit Accounts Receivable: $1,000
Your income statement shows:
- Gross Patient Revenue: $2,000
- Less Contractual Adjustments: ($1,000)
- Net Patient Service Revenue: $1,000
This presentation lets management see both production (gross charges) and the impact of payer contracts.
Why use a contra-revenue account?
Keeping contractual adjustments in a separate contra-revenue account rather than posting only net revenue provides valuable operational information:
- Total provider production (gross charges)
- Percentage written off due to payer contracts
- Net collectible revenue
- Changes in payer reimbursement over time
- Better benchmarking of reimbursement rates
Many practices monitor the contractual adjustment percentage:
Contractual Adjustments ÷ Gross Charges
This metric helps identify changes in reimbursement by payer or specialty.
Alternative approach under GAAP
Many healthcare organizations that prepare GAAP financial statements recognize revenue at the expected collectible amount rather than first recognizing the full billed charge. Under this approach:
- Gross charges are maintained in the practice management or billing system for operational reporting.
- The general ledger records only the estimated transaction price (the amount expected to be collected based on contracts and historical experience).
- Contractual adjustments are reflected through the revenue recognition process rather than as a separate reduction after recording gross charges.
This approach aligns with current revenue recognition standards and is common in audited financial statements.
Practical recommendation
Many private medical practices use both systems:
- Practice management/EHR system: Tracks gross charges, contractual adjustments, collections, and payer analytics.
- General ledger: Either
- records gross charges and contractual adjustments separately (useful for internal management), or
- records only net patient service revenue if following a GAAP-based net revenue model.
If your practice has audited financial statements or follows U.S. GAAP, it's worth confirming with your CPA which revenue recognition method is appropriate. Internally, regardless of the GL approach, maintaining visibility into gross charges, contractual adjustments, and collections is valuable for monitoring payer performance and practice profitability.
