Cleveland Clinic Health System Obligated Group - FMSbonds.com

Cleveland Clinic Health SystemNotes to Consolidated Financial Statements (continued)3. Accounting Policies (continued)Net Patient Service RevenueNet patient service revenue is reported at the estimated net realizable amounts from patients,third-party payors and others, including retroactive adjustments under payment agreements withthird-party payors. The System has agreements with third-party payors that generally provide forpayments to the System at amounts different from its established rates. An estimated allowanceis recorded which results in accounts receivable being reported at the net amount expected to bereceived from third-party payors. In 2007, net patient revenue was increased by approximately$43.4 million related to a change in estimate for this allowance.The System is paid a prospectively determined rate for the majority of inpatient acute care andoutpatient, skilled nursing and rehabilitation services provided (principally Medicare, Medicaidand certain insurers). These rates vary according to a patient classification system that is basedon clinical, diagnostic and other factors. Medicare payments for capital are received on aprospective basis and on a cost reimbursement methodology for Medicaid. Payments arereceived on a prospective basis for the System’s medical education costs, subject to certainlimits. The System is paid for cost reimbursable items at a tentative rate, with final settlementdetermined after submission of annual cost reports by the System and audits thereof by theMedicare fiscal intermediary. Provision for estimated retroactive adjustments, if any, resultingfrom regulatory matters or other adjustments under payment agreements are estimated in theperiod the related services are provided. The System recorded an increase in net patient servicerevenue of $43.6 million and $41.1 million in 2007 and 2006, respectively, related to changes inestimates.Laws and regulations governing the Medicare and Medicaid programs are complex and subjectto interpretation as well as significant regulatory action, and in the normal course of business theSystem is subject to contractual reviews and audits. As a result, there is at least a reasonablepossibility that recorded estimates will change in the near term. The System believes it is incompliance with applicable laws and regulations governing the Medicare and Medicaidprograms and that adequate provisions have been made for any adjustments that may result fromfinal settlements.Under other arrangements with third-party payors, the System is paid prospectively determinedrates per discharge, at a percentage of established charges or at prospectively determined dailyrates.9