Contractual Adjustment

What is a contractual adjustment?

A contractual adjustment is the difference between what a practice bills an insurer and the lower amount the insurer has contracted to pay. Bill $400 for a procedure when the payer's allowed amount is $260, and the $140 difference is a contractual adjustment. It is written off, never collected, and never billed to the patient. For any practice working with insurance, this is the largest single reduction between gross charges and actual revenue.

Why gross charges tell you nothing

A practice looking at $2 million in billed charges may collect well under half of it, and the gap is mostly contractual adjustments rather than bad debt. Each payer has its own fee schedule, so the same procedure yields a different net amount depending on who is paying. Books that report gross charges as revenue overstate performance badly. Revenue should be recorded net of expected adjustments, with the write-off recognized when the claim is billed rather than when payment arrives.

Separating adjustments from real collection problems

Contractual adjustments are contractually required and not a performance issue. Denials, patient balances written off, and timely-filing write-offs are performance issues. Posting all of them to one write-off account hides which is which. Keep contractual adjustments in their own account, broken out by payer where your system allows, so you can see net yield per payer. That is the number that tells you whether a contract is worth renewing.