Did you know that regardless of the amount you bill to the payer, they will pay you based on the contracted rate, i.e., the allowed amount? But what exactly is it?
It is the maximum amount a payer will pay you for the rendered care service or procedure.
In this guide, we will discuss everything you need to know about the allowed fee, from its significance to its calculation. Moreover, we will compare it to the billed amount and the adjusted amount. So, continue reading!
How to Calculate the Allowed Amount in Medical Billing?
The calculation is divided into two parts. First, the total allowed fee, as specified in the contract, is determined. Next, this amount is split between the insurance carrier and the patient.
The Payer’s Formula
The insurance payer calculates the payment based on the allowed amount, minus any patient cost-sharing.
| Payer Payment = Allowed Amount – Patient Responsibility |
The Patient’s Formula
The patient’s responsibility is always a percentage or fixed portion of the allowed amount.
| Patient Responsibility = Allowed Amount × Coinsurance Rate |
The Provider’s Write-Off Formula
This is the amount the healthcare provider adjusts off the ledger.
| Contractual Adjustment = Billed Amount – Allowed Amount |
Example Scenario & Allowed Amount Calculation
Imagine a 45-year-old male patient who visits a physician for a complex follow-up on a chronic condition. Thus, the provider documents the encounter and submits a medical claim for CPT code 99214.
Note that the physician is in-network. This means that they have a pre-existing contract with the insurance company.
With that established, let’s talk about the numbers. The physician billed the payer $250. However, the allowed fee in the contract is $150 for CPT code 99214. Besides, the patient plan includes a 20% coinsurance rate.
Step-by-Step Calculation:
| Calculation Steps | Formula | Result |
|---|---|---|
| Step 1 – Determine the Ceiling | It is equal to the contracted rate. | $150 |
| Step 2 – Calculate Write-Off | $250 (billed) – $150 (allowed) | $100 (adjusted amount) |
| Step 3 – Calculate Patient Share | $150 (allowed) × 20% | $30 (patient responsibility) |
| Step 4 – Calculate Payer Share | $150 (allowed) – $30 (patient share) | $120 (insurance payment) |
Allowed Amount vs. Billed Amount
The table below offers an at-a-glance view of the key differences between allowed and billed amounts in medical billing:
| Allowed Amount | Billed Amount | |
|---|---|---|
| What Does It Entail? | The maximum amount a payer deems payable against a care service. | It is the total charge or list price sent by the provider for a care service. |
| Who Determines It? | The insurance carrier determines it through a negotiated contract. | The healthcare practitioner or facility determines it. |
| Contractual Obligation | It is a legally binding agreement for in-network healthcare providers. | It is often inflated, but it does not affect the legal payment rate. |
| Impact on Patients | Copays and deductibles are calculated from this amount. | If this amount is high, it can result in sticker shock on initial statements. |
| Accounting Action | The difference between the billed and allowed fee is written off as an adjustment. | It stays on the ledger until the claim is processed. |
To summarize, the billed amount is the total dollar amount a healthcare provider charges for a specific service or procedure. On the other hand, the allowed amount is the maximum amount a payer will reimburse for a covered service based on their contract with the provider.
Let’s review a real-world example to better understand how these amounts interact during a typical claim lifecycle:
| Transaction Component | Dollar Amount | Explanation |
|---|---|---|
| Billed Amount | $350 | Assume it to be the cardiologist’s standard fee for a consultation. |
| Allowed Amount | $230 | The payer-provider contract states this amount as the allowable fee for the billed CPT code. |
| Contractual Adjustment | $120 | Since it is the difference between the allowed and billed amounts, the provider will write off this amount. |
| Payer Reimbursement | $184 | With an 80/20 plan, the payer reimburses 80% of the allowed fee. |
| Patient Responsibility | $46 | The patient is responsible for paying for the remaining 20% of the allowed fee. |
Allowed Amount vs. Adjusted Amount
The following table discusses the key distinctions between allowed and adjusted amounts in medical billing:
| Adjusted Amount | Allowed Amount | |
|---|---|---|
| What Does It Entail? | The portion of the original bill that is written off and cannot be collected. | Maximum allowable fee against a care service. |
| How Is It Determined? | It is the difference between the billed amount and the allowed fee. | It is defined by the provider’s contract with the insurance carrier. |
| How Does It Impact Revenue? | It represents non-collectible revenue or bad debt. | It is the actual revenue the practice expects to collect. |
| Who Is Responsible For Paying It? | No one pays it. | The payer reimburses this amount. |
| Accounting Role | It is written off to balance the books. | Determines the patient’s copays and deductibles. |
Simply put, the allowed fee is the negotiated rate between the payer and provider. Conversely, the adjusted amount is purely an accounting entry to balance the books.
Role of Payers in Determining the Allowed Amount
This section discusses the role of insurance companies in determining the allowed fee:
Contractual Negotiations
Payers negotiate the specific reimbursement rates with their in-network providers. That is, after a successful credentialing process, the contracting process begins.
It is basically a legally binding agreement that determines the allowed amount for every procedural code.
Fee Schedule Maintenance
Are you wondering how insurance carriers create and update their internal fee schedules? Medicare determines its rates using the Medicare Physician Fee Schedule (MPFS), i.e., based on the resource-based relative value scale (RBRVS).
Commercial payers try to set the allowed fee by benchmarking Medicare rates. However, their rates can vary from those of Medicare and Medicaid.
Medical Necessity Review
The insurance companies have the right to set the allowed amount to zero for non-medically necessary and experimental care services.
Significance of Allowed Amount for Healthcare Providers
For healthcare providers, it offers the following benefits:
- It helps providers ensure accurate revenue forecasting. That is, focusing on the allowed amounts rather than the billed amounts prevents overestimating actual cash flow.
- The allowed amount defines the legal payment limit a provider can collect.
- It enables providers to determine the patient’s responsibility and collect the amount upfront at the point of service.
- It allows healthcare providers to compare different payer contracts to understand their profitability.
- That’s not all; it ensures proactive calculation of contractual adjustment and write-offs. The outcome? A clean ledger and a balanced book.
- Besides, it serves as the baseline for future contract negotiations.
Streamline Medical Billing With NeuraBill
Undoubtedly, it was quite a detailed guide! But it is time to conclude it. Just remember the formulas for the allowed amount and contractual adjustment, and you are good to go!
However, if you want professional help, you can outsource medical billing and coding services to professionals like NeuraBill. This will save you from billing-related administrative tasks without breaking the bank.
