In Medicare, "contractual" refers to the financial difference between what a healthcare provider bills for services and the amount they are actually paid, often due to negotiated contracts with Medicare or other payers. This difference is a write-off, meaning the provider cannot bill the patient for the unpaid amount. Essentially, it's the agreed-upon amount that Medicare or a specific insurer will pay for a service, which is often less than the full billed charge.
Contractual Allowance/Adjustment:
This term describes the reduction in the billed amount due to a contract with Medicare or another payer. It's the difference between the gross charge (what the provider initially bills) and the net amount paid (the agreed-upon amount).
Why it exists:
Healthcare providers often negotiate lower rates with insurance companies and government programs like Medicare to ensure they get a consistent flow of business. These negotiated rates are reflected in contractual allowances.
Example:
If a provider bills $100 for a service, but Medicare only pays $70 due to a negotiated rate, the $30 difference is a contractual allowance.
Impact on patients:
The patient is typically responsible for the remaining portion of the bill, such as a copay or coinsurance, after Medicare's payment. They are generally not responsible for the contractual allowance.
Medicare's role:
Medicare has specific payment systems and fee schedules for different services, which are used to determine the amount they will pay. Hospitals, for example, contract with Medicare to deliver care and agree to accept predetermined rates as full payment under the Inpatient Prospective Payment System (IPPS)