Any healthcare provider, billing team member, or revenue cycle management professional needs to know about contractual changes in medical billing. Changes to contracts have a direct effect on your bottom line and cash flow projections, no matter what size medical practice you operate. This complete guide will explain what contractual adjustments are, how they work, why they are important for your practice, and how to handle them so that you make the most revenue while still following the terms of your agreements with payers. 

What is a Contractual Adjustment in Medical Billing? 

In medical billing, a contractual adjustment is the difference between how much a healthcare provider charges for a service and how much the insurance company agrees to pay back. This decrease isn’t a mistake or a loss because of bad billing; it is a planned, expected part of doing business with insurance companies. When a provider agrees to work with an insurance company, they have to sign a contract that specifically discusses how much the insurance company will pay for certain medical services and procedures. 

A doctor might charge $500 for an office visit, but Medicare will only pay $300 for that same visit code. The $200 difference is subject to a contractual adjustment. This amount is not charged to the patient nor written off. Instead, the patient must only pay their part, which is usually a copayment, coinsurance, or deductible, if they have not already done so for the year. 

Credex Healthcare knows how complicated contractual changes can be in medical billing and helps healthcare providers and billing teams handle these changes accurately and efficiently. Our team uses trusted practice management systems to make sure that all changes to contracts are recorded, tracked, and balanced correctly. 

How Contractual Adjustments May Impact Your Revenue and Cash Flow 

You cannot say enough about how changes to contracts can hurt the finances of your medical practice. It’s common for healthcare providers to have an income projection based on how much they’ve been charged instead of how much they’re allowed to charge. This causes big differences between the expected and real condition of the cash flow. 

An Explanation of Benefits (EOB) or Electronic Remittance Advice (ERA) is sent with a disbursement claim from an insurance company to a medical office. There are three important figures on these papers: the amount that was billed, the amount that was allowed, and the amount that the patient is responsible for. The automatic difference between the charged amount and the allowed amount is the contractual adjustment. 

If you don’t keep accurate records of changes to contracts, your practice will always estimate more money coming in than it does. This could mean poor financial management, missing payroll deadlines, and the inability to buy new equipment or hire more staff. Practices that closely watch changes to contracts, on the other hand, keep their cash flow healthy, make better business decisions, and accurately predict revenue for budgeting purposes. 

Also, knowing about changes to contracts helps your billing team follow the terms of their agreements with payers. Insurance companies check claims to make sure that providers aren’t illegally billing patients for changes to contracts. Keeping accurate records shows that your practice knows and follows the terms agreed upon by payers. 

Contractual Adjustment vs. Write-Off: Understanding the Key Difference 

One thing that makes medical billing hard to understand is the difference between contractual adjustments and write-offs. In your revenue cycle management system, you should keep track of different types of revenues that providers don’t receive because of contractual agreements. 

It’s often written into the contract you signed with the insurance company that certain discounts will be given. When you agree to work with Medicare, Medicaid, Blue Cross Blue Shield, or UnitedHealthcare, you will know the exact amounts that can be charged for each service code. When practices join insurance networks, they often have to pay extra for changes to their contracts. 

But write-offs happen for different reasons. It’s possible for a claim to be denied, the patient’s insurance to not cover the service, or the patient to not be able to pay after several failed attempts. You may also have to write off something when you fix a billing error or change a charge because of inaccurate coding or missing paperwork. 

You need to know these differences because once you sign a contract with a payer, you can’t get out of contractual changes. They are part of your provider’s contract adjustment plans. Write-offs, on the other hand, could mean that your billing isn’t working right, that you put in the wrong codes, or that there are issues with how you submit your claims that could be fixed by improving revenue cycle management. 

Credex Healthcare highlights this important difference as part of their training in managing the revenue cycle. This makes it easier for billing teams to plan their work. Abiding the rules in the contract is non-negotiable if you want to stay in-network. Your billing team should instead work on cutting down unnecessary write-offs and raising the number of clean claims that are submitted and processed. 

Understanding Claim Adjustment Reason Codes (CARCs) and their Meanings 

In healthcare billing, claim adjustment reason codes (CARCs) are very important to understand why insurance payments and denials were considered. These standard codes explain changes made to claims, which is important for managing the revenue cycle well. 

Common adjustment codes include

• CO (Contractual Obligation) Codes: Indicate changes due to payer contracts, e.g., CO-45 shows a contract change where reimbursement differs from billed amounts. 

• PR (Patient Responsibility) Codes: Reflect amounts that are of patient responsibility, with PR-1 for deductibles, PR-2 for coinsurance, and PR-3 for copayments. 

• OA (Other Adjustment) Codes: Represent changes outside contracts or patient responsibility, such as benefit adjustments. 

• CR (Correction or Reversal) Codes: Indicate a reversal or correction of previous adjustments. 

These codes are used in both Medicare and Medicaid’s ERA or EOB reports, which help billing teams diagnose issues with processing claims and mistakes in coding. Credex Healthcare offers comprehensive training and guidance on CARCs to help billing teams and solo practices learn more about effectively managing the revenue cycle beyond just processing claims. 

Why Do Contractual Adjustments Occur in Healthcare? 

Changes to contracts help healthcare providers and insurers decide on how to pay each other on a specific bill. Insurance companies coordinate with each other about negotiating such rates, aiming to make customers pay less for their premiums. If an insurance company pays a hospital $300 for an office visit instead of $500, the insurance company could pay less for those patients. Providers are willing to charge less if it means they can see more patients for less cost on each visit.  

Patients will benefit from these changes because they won’t have to pay unreasonably high service fees. Because of this, they usually pay less after their copay, deductibles, and coinsurance. Meanwhile, healthcare providers need to make changes based on their contractual arrangements with Medicare, Medicaid, and other private insurers. 

Healthcare administrators should see changes to contracts as part of running the business instead of unfair price cuts, since they know why those changes occur in the first place. Credex Healthcare helps providers from different states set up contracts with payers apart from getting credentialed and enrolled in their insurance networks. This ensures that even before the deal is signed, the rates and terms are already made clear. 

How to Calculate Contractual Adjustments Accurately 

Accurate calculation of contractual adjustments is fundamental to precise medical billing. The process is straightforward in concept but requires attention to detail and proper system configuration. 

The Basic Formula: 

Contractual Adjustment = Billed Amount – Allowed Amount 

For example, if you bill $500 for a procedure and the payer’s allowed amount is $300, the contractual adjustment is $200. This $200 is written off and never collected from the patient. 

However, the process becomes more complex when you factor in patient responsibility. Here’s a more complete example: 

   Billed Amount: $500 

   Allowed Amount (per payer contract): $300 

   Contractual Adjustment: $200 (written off) 

   Patient Deductible (not yet met): $100 

   Remaining for Insurance to Pay: $200 ($300 allowed – $100 patient deductible) 

   Final Insurance Payment: $200 

You need to set up the payer contracts and allowed amount tables in your practice management system accurately. Epic, Waystar, Kareo, and Availity are some of the trusted billing software that lets you enter payer contracts and agreed-upon rates. When claims are submitted, the system uses these configurations to determine the expected payment and any changes that need to be made to the contract. 

Common mistakes in calculating contractual adjustments include: 

• Failing to update payer rates when contracts are renewed, resulting in incorrect expected payments 

• Inputting wrong procedure codes in the payer contract table, leading to incorrect allowed amount 

• Not considering factors that change reimbursement rates 

• Not initiating changes to practice-specific plans, like outlier fees or bundled rates 

• Not including fees for additional services like imaging or physical therapy 

Credex Healthcare comprehensively guides medical practices on how to use systems like Waystar to enter and maintain accurate payer contracts and agreed-upon rates. Auditing your contracted rates on a regular basis can help you find problems with them before they cause major problems that could affect your revenue or compliance. 

Strategies for Reducing Financial Loss from Contractual Allowances 

While contractual adjustments are agreed-upon reductions that cannot be removed, there are strategic approaches to minimize their impact on your financial health.

Smart Talks with Payers

When you renew, don’t just accept the rates. Use your growth and outcome projections to set higher price margins for services that are commonly used, which can potentially increase your annual revenue.

Correct Medical Coding and Paperwork   

Correct coding with CPT and ICD-10 makes sure that you get paid the right amount. Proactive prevention of billing errors, regular training, and conduct of audits help maximize the allowable amounts of your services.

Sending in a Clean Claim   

Claims that have been mistakenly processed could be turned down or held up. Putting in place an efficient workflow for cleaning up claims before they are sent in greatly reduces these negative consequences.

Regular Checks of Bills   

Audits identify problems like too many changes to contracts or insurance payments that were not expected, which makes sure that billing is done correctly.

Dealing with Denials and Appeals   

You can appeal claim denials to retrieve loss of income. Careful examination of claims that were rejected can reveal missed chances of appeal.

Improving the Fee Schedule   

Set billed charges that consider common payer discounts. This ensures that out-of-network patients get fair market rates and makes your practice lessen minimal changes to your contracts. 

FAQs 

What is the definition of a contractual adjustment in healthcare medical billing?  

A contractual adjustment is the difference between a provider’s charged amount and the insurance payer’s agreed reimbursement rate, which is written off and not billed to the patient.

How does a contractual allowance differ from other types of write-offs in medical billing?

A contractual allowance is a projected reduction per payer agreement, while write-offs occur for unexpected instances like denials or bad debt.

Do all insurance payers calculate contractual adjustments the same way, or do they vary by payer?  

Contractual adjustments differ by payer, as they negotiate their own allowed amounts, leading to varying adjustments for the same procedure code.

What steps should our billing team take if we believe a contractual adjustment was calculated incorrectly on an EOB or ERA?  

Review the payer contract for the allowed amount, configure your billing system for accuracy, and contact the payer’s provider relations if there’s a discrepancy.

Is there a way to appeal or dispute a contractual adjustment after a claim has been paid?

Generally, no appeal is possible for post-payment contractual adjustments, but you can dispute incorrect adjustments or re-appeal denied claims that should have been paid. 

Conclusion 

Changes to medical billing contracts are necessary and constitute a planned aspect of working with insurance networks. People often think they are mistakes. However, healthcare practices need to know, figure out, keep track of, and deal with these changes to stay financially stable and growing. It’s important to learn it and put contractual adjustments into practice. Billing teams also need to diagnose and identify the root cause of these changes, and practice management systems need to apply the rules set by current payer contracts accordingly.  

Any billing team or third-party RCM services should make an agreement to send in clean claims and apply full integrity with their billing, and administrators should include these changes in their financial plans. Credex Healthcare helps medical providers across the U.S. take care of managing complicated medical billing, ensuring accurate billing, and maximizing the potential of their revenue cycle management. Learning how to apply minimal adjustments in contracts helps with long-term growth, makes billing go more smoothly, and realizes error-free financial reporting. 

Credex Healthcare helps practices change how they handle contractual adjustments by providing them with training and consultation services, helping them generate more income in the long run.