Contractual Adjustment: A Hospital Billing Term

Reducing What’s Owed on a Patient’s Bill

A Contractual Adjustment is a part of a patient’s bill that a doctor or hospital must write-off (not charge for) because of billing agreements with the insurance company.  Adjustments, or write-off’s, are the dollars that are adjusted off a patient account for any reason. The Contractual Adjustment is the most common type of adjustment.

Just as an insurer and policyholder enter a contract where the insurer promises certain payments in exchange for premiums, the insurer and provider also have a contractual arrangement. When providers agree to accept an insurance plan, the contract will include many details including the amount the insurance company will pay the provider for certain procedures.

Allowable Amount

Providers charge more for services than what the insurance company agrees to pay and the amount that is paid by the insurance is known as an allowable amount.  The amount above what the insurance company agrees to pay is a reduction known as a contractual adjustment.  Providers that participate believe the broader access to members is worth the contracted rates on services.  Additionally, this is a way the providers can ensure that they are paid at least a significant portion of their fee which patients without insurance may not be able to afford.

Not Everything will have a Contractual Adjustment

An important thing to remember about Contractual Adjustment’s is that they are only made on services covered by the insurance company.  This means that a patient who requires a certain medical service which the insurance company does not cover will end up paying the full amount charged by the medical provider with no contractual adjustment to limit the cost.

An example of a Contractual Adjustment is when a provider charges a practice fee for a certain service of $100.  The contracted rate between the insurance company and the provider for this service is $80, with the insurer paying $64, or 80%, and the remaining 20% of the contracted rate amount paid by the patient.  The $20 difference between the $100 charged by the provider and the $80 collected is adjusted off the patient account as a contractual adjustment.

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