What Is Contractual Adjustment in Medical Billing?

Have you at some time been curious about how your medical bill is typically much greater than what your health insurance paid? 

A contractual adjustment is the term given to the difference between an in-network doctor or hospital’s billed charges and the contracted payment rate agreed upon by that doctor or hospital with your health insurer. 

Contractual adjustments are a common occurrence as part of the standard billing process for doctors who have contracts with insurance companies. The purpose of this article will be to help answer questions regarding contractual adjustments and their importance.

What Does COB Stand for in Medical Billing?

A contractual adjustment is essentially the difference between what a medical provider is billing and what an insurance company has agreed to pay through a contracted arrangement.

Contractually, insurance companies negotiate with medical providers within their networks regarding discounted rates (allowed) for services rendered.

When processing claims, the insurance company reviews the amount of the claim submitted by the physician or medical service versus the amount they deem acceptable (the allowed), as per their contract.

The contractual adjustment represents this discount; since patients are typically protected from such adjustments by law, they generally do not need to be concerned with paying additional monies toward the original charge billed by the provider. 

In other words, when a provider submits a claim for reimbursement, they submit their charge to the insurance company for consideration. The insurance company then reimburses according to their negotiated allowable.

How Do Contractual Adjustments Work?

1. Provider Submits the Claim

When a patient receives medical services, they are billed by their health care provider, who then submits a claim to the health insurance carrier for reimbursement. 
The claim submitted contains information about the treatment that was provided, what was being treated, and an estimate of how much money was spent. 

2. Insurance Reviews the Claim

The insurance company reviews the claim for coverage of the service as part of the patient’s health plan. Additionally, it reviews the contracted payment rates for services that are provided by the contracted provider.

3. Contractual Adjustment Is Applied

The “provider” usually does not have the ability to charge an insurance company for services that were billed at a higher price. 

The billing process typically has a way of checking what the price should be. If the pricing is found to be wrong, then the amount charged by the provider will need to be changed. This is called a contractual adjustment.

4. Insurance Pays the Allowed Amount

After the claim has been adjusted by Medicare or Medicaid, the insurance company will pay their portion of the “allowed” amount to which they are entitled for the services provided to the insured, according to the patient’s insurance benefits as outlined in the Explanation of Benefits (EOB).

5. Patient Pays Any Remaining Responsibility

If there are parts of the plan such as a deductible, copayment, or coinsurance, then the patient will be expected to pay those portions. The patient will not be responsible for paying the contractual adjustment.

Why Are Contractual Adjustments Important?

Contractual adjustments are vital in ensuring that all health care providers receive payment based on the terms of their individual contracts with an insurance company.

These adjustments ensure a patient does not have to pay for services they do not owe, e.g, hospital services related to a specific illness or injury, and also provide accuracy of charges on the bill.

By accurately documenting contractual changes, those involved with medical billing will be able to reduce errors and disputes over reimbursement.

Contractual Adjustment vs. Write-Off

You typically see certain words used in conjunction with one another; however, it does not necessarily imply the same meaning. A contractual adjustment is the amount of money that must be removed by a provider due to a contract with an insurance company. 

The contractual adjustment is expected and will occur as a result of a contractual obligation between the parties involved.

When a provider elects to “write off” a specific dollar amount, this is an independent decision made by the provider. There are multiple reasons why a provider would choose to do so, such as billing errors, charity care, etc. And/or non-payment from patients.

Example of a Contractual Adjustment

A healthcare provider billed the total cost of $500 for an eligible medical service.

The billed amount = $500

The insurance allowed amount = $350
Adjustment= ($500 – $350) =$150

After receiving a check from the insurance company in the sum of $280 and having to pay a deductible or copay of $70, the insurance company paid its full obligation, and the patient also paid their required coinsurance. 

The insurance company’s contractual obligations were satisfied when it paid $280, and the patient met their coinsurance obligation by paying $70.

Conclusion

Contractual adjustments are common in medical billing. In essence, contractual adjustments illustrate the difference between the fee charged by a healthcare provider and the amount of money an insurer will reimburse.

Understanding how contractual adjustments are calculated may be significant for your comprehension of medical billing and accuracy with respect to billing. 

Contractual adjustments assist with clarity as well as accuracy in the billing process. Understanding contractual adjustments will help you to have a better grasp of the medical billing process and provide you with a greater ability to avoid mistakes as well as confusion.