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If you’ve ever stared at an EOB and thought, “Wait, where did my money go?” you’re not alone. Contractual adjustments are one of the most misunderstood parts of medical billing. They can make a $500 claim shrink to $300 in a heartbeat—and if you don’t handle them right, your practice could lose thousands every year. In this guide, we’ll break down contractual adjustments so you and your team know exactly what they are, how to calculate them, and how to keep insurers accountable.

What Is a Contractual Adjustment?

A contractual adjustment is the amount you must write off because of your contract with an insurance company. It’s the difference between your billed charges and the allowed amount set by the insurer.

Example:

• You bill $200 for a visit.
• Insurance allows $120 for that CPT code.
• The $80 gap = contractual adjustment.

That $80 is not collectible. You can’t bill the patient for it. You can’t appeal it. It’s locked in by your contract.

CMS reports that contractual adjustments make up nearly 15–25% of total billed charges for many practices. If you don’t track them correctly, your revenue reporting gets messy fast.

If you don’t manage contractual adjustments properly, three things happen:

1. Revenue loss – If insurers underpay and you treat it as an adjustment, you lose money.
2. Bad reporting – Your A/R reports won’t reflect reality. You may think you’re collecting less than you are.
3. Compliance risk – Balance billing patients can land you in hot water with payers and regulators.

According to MGMA, practices lose 3–7% of revenue each year simply from underpayments and incorrect adjustments. For a practice billing $2 million annually, that’s $60,000–$140,000 left on the table.

Why Do Payers Set Contractual Adjustments?

Insurance companies set these adjustments to control healthcare costs and standardize payments. When you signed your provider contract, you agreed to accept their “allowed amounts” as full payment.

Here’s why adjustments exist:

• Cost control: Insurers negotiate lower rates with in-network providers.
• Fair pricing: Two doctors in the same network get paid the same for the same CPT code.
• Patient protection: Prevents patients from being balance billed for huge differences.

For example, without adjustments, if one practice charges $1,000 for a CT scan and another charges $500, patients could be on the hook for wildly different out-of-pocket costs. Adjustments keep the system predictable.

Contractual Adjustment vs. Other Adjustments

Contractual Adjustment

Contarctual amount is the write-off between your billed charge and the insurer’s allowed amount.

This is the most common type of adjustment and happens every time you bill insurance. It’s mandatory because it’s tied to your provider contract with the insurer.

 Insurer’s contract rate is lower than your fee schedule.

Example:

You bill $200, but your contract with the insurer says the allowed amount is $120. The $80 difference becomes the contractual adjustment.

Denials

Denials are different because they don’t mean the insurer won’t pay forever—they mean the claim has a problem that needs fixing.

Denial is a rejected or unpaid claim from the insurer.

The reasons of denials are coding errors, missing prior authorization, invalid patient coverage, or lack of medical necessity.

Example:

You bill $500 for an MRI, but the insurer denies it because prior authorization wasn’t obtained.

Bad Debt

Bad debt refers to money that patients legitimately owe but never pay, even after billing and collections efforts.

It happens due to patient don’t pay their deductible, copay, or coinsurance despite reminders.

Example:

Patient owes $75 copay. You send three statements and even a collections notice, but no payment is made. You write it off as bad debt.

Administrative Write-offs

These adjustments are your choice. They’re not required by insurance but may make sense operationally or for patient relations.

Courtesy discount, financial hardship, patient loyalty, or small balance write-off (e.g., less than $10).

Example:

A patient owes $25. You waive it as a courtesy rather than sending another statement.

How to Calculate Contractual Amount?

An Explanation of Benefits (EOB) is the insurance company’s way of telling you (and the patient) how a claim was processed. Think of it as a receipt that explains:

• How much you billed.
• How much the insurer agreed to pay.
• What the patient owes.
• What portion you must write off as a contractual adjustment.

Let’s use the example below:

• Billed amount: $500
• Allowed amount: $300
• Contractual adjustment: $200
• Patient responsibility: $50
• Insurer pays: $250

Billed Amount

This is your full charge for the service, often called the “retail price.” Practices set these charges on their fee schedule.

Important: You’ll almost never collect the full billed amount if you’re in-network with insurance.

Allowed Amount

This is the maximum payment the insurer will recognize for this service under your contract.

• The $300 is not random. It comes from the insurer’s fee schedule for that CPT code.
• By signing the contract, you agreed to accept this amount as full payment (between insurer + patient).

Think of it like airline tickets: You may list a flight for $500, but if the airline’s contract says a corporate partner can buy it for $300, you must honor that lower price.

Contractual Adjustment

This is the difference between your billed charge and the insurer’s allowed amount.

For example if builled amount is $500, and allowed amount is $300, then by applying formula:

• Formula: $500 (billed) – $300 (allowed) = $200 (adjustment).

So, the contractual adjustment will be, $200.

You must write this off. You cannot collect it from the patient.

This is where many patients get confused. They think you “gave them a discount.” In reality, it’s not a discount—it’s the result of your payer contract.

Patient Responsibility

This is what the patient owes out-of-pocket. It can include:

• Copay (fixed fee per visit, like $20).
• Deductible (the patient must pay a set amount each year before insurance kicks in).
• Coinsurance (a percentage of the allowed amount, like 20%).

In our case, the insurer assigned $50 to the patient’s share. That means you must bill the patient for that portion.

Insurer Pays

This is the insurer’s direct payment to you.

• Formula: $300 allowed – $50 patient responsibility = $250 insurer payment.

Together, the insurer and patient cover the entire allowed amount.

You Get Paid the Allowed Amount

In this example:

• You wrote off $200.
• You billed the patient $50.
• You received $250 from insurance.
• Total collected = $300 (the allowed amount).

The golden rule:

Contractual adjustment + Insurer payment + Patient responsibility = Billed charge.
Here: $200 + $250 + $50 = $500.

Common Mistakes Providers Make

1. Billing patients for contractual adjustments
   1. This is called balance billing, and it usually violates state law and payer contracts.
   1. Example: If you bill $500 but insurer allows $300, you can’t chase the patient for the missing $200.
2. Misposting adjustments
   1. Staff sometimes record adjustments incorrectly in the practice management system.
   1. This skews your collection rate. A healthy practice usually collects around 90–95% of net allowed charges, but if adjustments are posted wrong, your reports will look off.
3. Not reviewing EOBs carefully
   1. Insurance companies make errors. If they apply the wrong contract rate, your practice loses money.
   1. Studies show providers underpaid by insurers by an estimated 7–11% of claims annually due to processing errors.
4. Confusing adjustments with denials
   1. A denial may look like a write-off, but it’s not permanent. You may recover payment if you appeal.

Best Practices for Managing Contractual Adjustments

Here’s how smart practices handle adjustments:

• Know your contracts.
  Keep a copy of each payer’s fee schedule. When you bill a 99213, you should know if the insurer pays $90 or $120.
• Train staff thoroughly.
  Teach them the difference between contractual adjustments, denials, and write-offs. Use real EOBs for training.
• Audit regularly.
  Review at least 10 claims per payer each month. Compare billed vs. paid vs. allowed amounts. Catch underpayments early.
• Use billing software wisely.
  Most practice management systems can automate adjustments once you set up payer contracts. This reduces posting errors.
• Educate patients.
  Patients often think contractual adjustments are “discounts.” Make it clear:
  “Your insurance company negotiated this rate. We are required to accept it.”

Final Word

At the end of the day, contractual adjustments aren’t “bad debt” or “lost money”—they’re simply the price of playing in-network with payers. But how you track and manage them can make or break your revenue cycle. Mispost them, and you risk compliance issues. Ignore them, and you leave money on the table.

That’s where Swiftcare Billing comes in. We help practices like yours spot underpayments, stay compliant, and simplify billing workflows so you can focus on patients, not paperwork.

Want fewer write-offs and stronger collections?

Talk to Swiftcare Billing today and let’s make your revenue cycle work smarter.

FAQ

Q: Can I bill the patient for the adjustment?
No. Once you’re in-network, you must write it off.

Q: Do out-of-network claims have contractual adjustments?
Sometimes. It depends on the payer and the plan. Out-of-network benefits often allow higher billed charges, but patients may owe more.

Q: What if I suspect the insurer applied the wrong adjustment?
Check against your contract fee schedule. If it doesn’t match, submit an appeal or corrected claim.

Q: How often should I audit for underpayments?
Monthly is best, but quarterly is the minimum. Even a few errors add up fast.