What is the Allowed Amount in Medical Billing?

Nothing frustrates healthcare providers and medical billers more than receiving reimbursement that is substantially lower than the amount originally billed.

A payer may have policies and billing guidelines for maximum reimbursements, and the practice may not receive the full amount even if they comply with these policies. The reason? The allowed amount in medical billing.

A provider may submit a charge of $500 for a service that is later paid as $310 on the remittance advice. Unless the remittance advice is interpreted correctly, the reduced payment may appear unexpected. This gap is not an error. Rather, it is the allowed amount in insurance.

The insurance allowed amount is the maximum amount a payer or health plan allows for a covered service before applying patient cost-sharing and any contractual adjustments. This amount remains constant regardless of the provider’s actual charge. 

The allowed amount in medical billing is a single figure driving three distinct outcomes simultaneously:

• The reimbursed amount by the payer.
• The amount owed in coinsurance or copay.
• The amount of the original charge that can be written off as a contractual adjustment.

Allowed Amount vs Billed Amount​

The following is a quick description of the billed amount and the allowed amount in medical billing.

The billed amount, charge, or list price is the amount established by the healthcare provider or facility before claim submission. It is imposed before insurance is involved. 

Conversely, the allowed amount is the maximum reimbursable amount determined after the payer applies the applicable:

• The pricing methodology of that charge
• Contract terms
• Fee schedule

The Centers for Medicare & Medicaid Services (CMS) describes the allowed amount plainly in its consumer billing guidance as:

The maximum a plan will pay for a covered service, distinct from the total charges a provider lists on the bill. 

	Billed Amount	Allowed Amount
Definition	The amount the healthcare provider charges for a service.	The maximum amount the payer allows for reimbursement.
Governed by	The healthcare provider or facility.	The payer, based on contracts, fee schedules, or regulations.
Purpose in Claims	The amount submitted by the provider on the claim.	The amount used by the payer to calculate payment.
Role in Payment	Shows the amount the provider is requesting.	Sets the maximum amount the payer will reimburse.
Impact on Patient Costs	Does not determine the patient’s deductible, copayment, or coinsurance.	Used to calculate the patient’s deductible, copayment, and coinsurance.
What Happens to Higher Billed Amounts?	For in-network claims, the amount above the payer’s allowable is written off as a contractual adjustment.	For covered in-network services, it represents the maximum reimbursable amount used to determine the payer’s payment and the patient’s responsibility.
In-Network vs. Out-of-Network	Usually remains unchanged regardless of the provider’s in-network or out-of-network status.	For in-network providers, the allowed amount in medical billing is negotiated. For out-of-network providers, the billed amount may be higher than the allowable, resulting in balance billing.

Important Billing Note: Some payments may be protected by laws such as the No Surprises Act. The key thing to remember is that if an in-network provider charges more than the insurance plan allows, they must write off the difference, so the patient does not have to pay it. An out-of-network provider holds no such contract, so the provider may bill the patient for the difference unless federal or state balance-billing laws protect the patient.

How to Calculate an Allowed Amount?

Calculating the payer’s maximum allowable reimbursement can be challenging, especially for new medical billing professionals. The confusion exists because there is no single universal formula that applies to every payer or health plan.

The reason? The insurance allowed amount is payer- and plan-specific, and its fee methodology governing the claim also makes a massive difference. Nonetheless, the underlying logic for determining this amount has a consistent structure across most payer types.

Formula:

Allowed Amount = Lesser of (Provider’s Billed Charge or the Payer’s Contracted/Fee Schedule Amount).

Payers typically distribute the allowed amount as follows:

Allowed Amount = Plan Payment + Patient Responsibility (deductible + coinsurance + copay)

A Practical Example

Consider the case of an in-network provider who charges $500 for a diagnostic procedure. However, the payer’s fee schedule has a cap of $400 on the allowable amount. 

If the patient’s plan covers 80% of the allowable amount after the deductible has been met, the insurer remits $320. However, there is a remaining $80, which becomes the patient’s coinsurance. 

In this case, the provider writes off the $100 between the $500 charge amount and the $400 insurance allowed amount as a contractual adjustment. This $100 is not billed to the patient nor collected from the payer.

For Medicare Claims

For Medicare claims, the allowed amount is determined through the Medicare Physician Fee Schedule (MPFS). Under the Medicare Physician Fee Schedule (MPFS), each CPT/HCPCS code is assigned relative value units (RVUs). After geographic adjustment, the total RVUs are multiplied by the Medicare conversion factor to determine the allowable amount. However, it is applied to the code’s RVU, which covers the following:

• Physician work
• Practice expense
• Malpractice components

Note: Medicare adjusts RVUs using Geographic Practice Cost Indices (GPCIs) before applying the annual conversion factor to calculate the allowable. 

How Do the Payers Determine the Allowed Amount?

Allowed amounts do not remain the same, and providers should not assume a flat rate for a CPT code across different payers. Payers determine this maximum amount via multiple factors that shift the number:

Payer Type

The allowed amount varies for each payer type. For instance, Medicare determines the amount based on the Physician Fee Schedule.

Similarly, Medicaid programs generally use state-specific fee schedules, whereas commercial payers rely on negotiated contract rates with participating providers or provider groups.

Plan Type

The allowable may vary depending on the patient’s health plan. For example, HMO, PPO, and EPO products offered by the same commercial payer may reimburse the same service differently. 

Geography

Medicare uses the GPCI to adjust RVUs for regional cost differences. Therefore, the same procedure or service may be paid differently depending on the locality.

Specialty and Site of Service

Facility and non-facility settings often have different reimbursement rates for the same service.

Payers may also apply specialty-specific coverage or reimbursement policies that affect whether and how a service is reimbursed.

Network Status

In-network allowed amounts operate through a signed participation agreement. Conversely, out-of-network allowables may vary based on a payer’s:

• Usual, customary, and reasonable (UCR) methodology 
• Percentage of the Medicare rate

Clearly, the determination of the allowable depends on multiple factors. That’s why billing teams should verify allowables for each payer and health plan rather than relying on assumptions across contracts. Useful resources include:

• Payer fee schedules
• Remittance history
• Eligibility and benefits verification 

Common Examples of Allowed Amount by Payer Type

Payer Type	Provider’s Charge	Allowed/Negotiated Amount	Insurance Payment	Patient Responsibility
Medicare	$500	$310 (Medicare fee schedule)	$248 (80% of the allowable)	$62 (20% coinsurance)
Commercial PPO (in-network)	$500	$400 (contracted network rate)	$320 (80% after deductible is met)	$80 coinsurance
Medicaid	$500	$180 (state-established reimbursement rate)	$180 (generally paid in full)	$0 or a nominal copayment
Out-of-network	$500	$250 (payer’s usual, customary, and reasonable (UCR) allowance)	$150 (60% of the allowable)	$100 coinsurance + a potential balance bill for the remaining amount.

Why Allowed Amount Errors Cause Denials & Underpayments?

Incorrect calculation of the allowed amount can contribute to payment disputes. These errors commonly occur when a claim is priced using an:

• Outdated fee schedule
• Incorrect place-of-service code
• Wrong contract

In such situations, the payer’s adjudication system may:

• Generate an incorrect patient responsibility figure
• Reimburse at an incorrect amount
• Reject the claim outright due to a mismatch in pricing

Coordination of Benefits and Payer Order

The correct payer order is a crucial element of any claim submitted for reimbursement. The provider or billing team must determine the correct primary and secondary payer before submitting the claim. This is typically done before a claim is priced. 

It is necessary to complete the determination beforehand because coordination of benefits (COB) determines the allocation of payment responsibility between multiple health plans, which can affect reimbursement and patient responsibility.

If the billing team submits the claim with an incorrect payer order, the claim may be processed with an incorrect allowed amount or denied completely due to conflicts in the COB. 

Why Allowed Amount Accuracy Matters?

Industry research from the Healthcare Financial Management Association (HFMA) finds 90% of denials are preventable. Moreover, it indicates that nearly half are traceable to the:

• Eligibility verification errors
• Authorization delays
• Billing inaccuracy 

These upstream processes directly affect reimbursement accuracy and may contribute to denials or payment discrepancies. Remember, the allowed amount itself is determined by the payer’s applicable contract and reimbursement methodology.

Best Practices for Managing Allowed Amounts

Managing allowed amounts in medical billing is important. The question is, how do providers do it? The following are some of the best practices for management of allowables:

• Update fee schedules for all contracted payers and regularly compare them with remittance data.
• Review Explanation of Benefits (EOBs) and Electronic Remittance Advices (ERAs) against expected allowable amounts to identify underpayments early.
• Reconcile contractual adjustments monthly to verify accurate payer-based write-offs.
• Verify eligibility and benefits before visits to confirm plan type, network status, and expected maximum payables.
• Confirm coordination of benefits and payer priority for claims involving multiple insurance plans.
• Separate pricing and contractual denials from eligibility and medical necessity denials to identify reimbursement trends.
• Train front-desk and billing teams on payer-specific reimbursement policies and allowable amounts to improve patient cost estimates before services are provided.

Summing It Up

The allowed amount in medical billing is a key component of reimbursement. It determines the:

• Payer’s reimbursement amount.
• Patient’s financial responsibility.
• Applicable contractual adjustment (write-off) for covered in-network claims.

Verifying the correct allowable requires understanding:

• Payer fee schedules and contracts.
• Billed charges & allowed amounts.
• Accurate payer order (coordination of benefits).
• Posted payments and remittance advice (ERA/EOB).

Many in-house billing teams struggle to manage payer-specific billing and reimbursement guidelines. Fortunately, MediBillMD’s medical billing services ensure an accurate amount is calculated each time. 

FREQUENTLY ASKED QUESTIONS