Allowed Amount – Medical Billing Terminology

Hello and welcome to another issue of my blog!  Just as a reminder I have 4 kinds of blogs and you can find out all about them at the bottom of this post. 🙂

This post is for my medical billing series.  Whether you are in the medical industry or not, this post IS FOR YOU!!  Everyone visits doctors – either because they are sick are trying to prevent sickness.  Either way, this series is to help you understand the crazy world of medical billing.  I will be posting on everything from billing terminology to crazy diagnosis codes.

img_5317Today, I am discussing something that many people do not understand – Allowed Amount.  What does this mean?

If you read my post, How to Read Your Medical Bills – Is it Even a Bill? then you may already understand what this means.  (And if you haven’t read it, you should grab a cup of tea – or coffee if you aren’t allergic to the bean like me,☹ find a comfy spot and read it.)

However, whether you have read it or not, I thought it would be a good idea to go into a little more detail about allowed amounts.

In short – the allowed amount is simply the amount an insurance company is willing to pay for a specific service or procedure.

However, there are so many other things to consider when thinking about allowed amounts.  For example, you have to understand that there are several different insurance companies (known as “payers” in the medical billing world) and they all have different allowed amounts.

And if that isn’t confusing enough, the allowed amount is decided upon by a ton of factors!  Mostly private little algorithms for each payer, but some more common factors.

For example, the allowed amount for a specific procedure may be completely different depending on where it takes place.

For example, let’s say Amy and Aaron both live in the same town, both have Aetna and both, unfortunately, have chest pains on Saturday.  Amy decides she will take it easy and go see her doctor on Monday morning.  Aaron decides that his pains are too severe to wait to see his doctor so he goes to the emergency room Saturday afternoon.  Both of them get an EKG.  Let’s go one step further and say Dr. Todd Smith was the on-call doctor at the hospital on Saturday and saw Aaron and happens to be Amy’s regular doctor and saw her on Monday.  Just about everything is the same – except Amy had her EKG done at the doctor’s office and Aaron had his at the hospital.  It is very possible that Aetna will pay different amounts for these claims, even though they came from the same doctor and were the same exact procedure.

The CPT (Current Procedural Technology code) for an EKG (or electrocardiogram/ECG) is 93000.  According to http://www.medicarepaymentandreimbursement.com, the average fee amount (which I believe means allowed amount) for this code is $10 – $20.

Using those numbers, it wouldn’t be out of the ordinary for Medicare to allow $15.00, Blue Cross to allow $18.75 and Aetna to allow $18.02 for the exact same code billed from the exact same place. **Note: I am in no way stating that one company pays more or less than any other – just using insurance names and random amounts as an example.

In the example above with Amy and Aaron, they both had the same insurance, but let us change it up and say that Amy has Medicare and Aaron has Blue Cross and both patients were seen in the doctor’s office.  Let us also say that Dr. Smith bills $45.00 for this service.  Using the numerical example above, assuming both patient’s insurance were current, Dr. Smith would receive two checks with very different amounts.

The one from Medicare would say something like this:

Procedure: 93000
Billed amount: $45.00
Allowed amount: $15.00
Contractual adjustment: $30.00
Paid to physician: $15.00

Notice the doctor only gets paid $15.00 for this service, even though he billed $45.00.  The $15.00 would have been an agreed upon amount when Dr. Smith and Medicare created their contract.  This means that no matter what Dr. Smith bills, Medicare would only pay $15.00 and anything over that is a contractual adjustment.  It cannot be billed to the patient and is not considered a loss since the $15.00 is the agreed upon amount.  It just basically floats into thin air and disappears.

So you may be asking – if Dr. Smith knows that Medicare is only going to pay $15.00 then why not just bill them $15.00?  Let’s look at Aaron’s case…

The check from Blue Cross would say something like this:

Procedure: 93000
Billed amount: $45.00
Allowed amount: $18.75
Contractual adjustment: $26.25
Paid to physician: $18.75

Notice Dr. Smith gets paid $18.75, the same as the allowed amount, even though he billed $45.00.  The contracted amount between Dr. Smith and Blue Cross states he gets paid $18.75 each time he bills 93000, no matter what he bills.

So, if Dr. Smith set his price for an EKG at $15.00, he would have gotten $15.00 from Medicare and only $15.00 from Blue Cross!  The allowed amount is just that… allowed.  Meaning it will pay up to that amount.  The doctors have to set their fee schedule (this is their pricing) high enough so that it will cover the highest paying insurance to make sure they get the most money for their services.

Now before you go hopping on your soapbox about doctors abusing the system to get more money – think about this.  Imagine you sell cupcakes for a living.  Let’s say there are 2 cafes in town that want to buy your cupcakes.  One is a small mom-n-pop cafe that has been in town for years and wants to buy 5 dozen cupcakes a week.  You sell them for $10.00 a dozen so you get paid $50.00 a week.  However, the other cafe is a large bistro and hosts several corporate events daily.  They want to purchase 50 dozen cupcakes a week, but only if they can pay $7 a dozen, which would be $350 a week.  Do you accept those terms?  Of course, you do!!  Would you start selling your cupcakes at $7 a dozen to the smaller cafe to be fair?  No, of course, you wouldn’t.  Business is about making money.  Period.

Yes, there are doctors that abuse the system.  There are also bakers that abuse the system.  People in all kinds of professions abuse the system every day.  That doesn’t mean that everyone does.

Medicare publishes their allowable amounts for each code to physician’s, most other insurance companies do not share their allowable until you enter into a contract with them.  So most doctors take Medicare’s allowable and double it to come up with the amount to bill.  Some doctors even triple or quadruple it.  While I think that is a little aggressive – it doesn’t change a thing because, in the end, the insurance company is only going to pay the agreed upon allowed amount if the doctor is in contract with them.  If the doctor is out of contract or OON (Out of Network) then – that is a whole other ball of wax.

I will, on a bit of a tangent, say that setting the billed amount too high – does affect self-pay patients.  If you are a self-pay patient – make sure you ask for an itemized statement from the doctor and question anything that doesn’t look right.  (Do that even if you have insurance.)  Then make sure to ask what the normal billed rate is and what discount they offered for being self-pay.  It is best to do this up front.  Many physician offices cater to people with no insurance.  Make sure you shop around!!!  But I digress…

There are so many other factors that can affect the allowed amount, all of which are usually included on the medical claim.  The bottom line is that the allowed amount is the amount that an insurance company is willing to pay up to for a specific service – based on the information provided on the claim and the patient’s plan.

Full disclosure: Medical Billing is something that I am very passionate about.  I am a patient somewhere and so are all of my family members and it is very important to me that our claims are handled as thoroughly as I handle other people’s.  I am a work at home mom and not all of my posts are medical billing related.  Not only did I start my own Medical Billing Educational Consultant business in 2018, I have been an Independent Consultant for a children’s book company since 2011 and I own a photography company with my daughter.  Also – I am a wife-ish, mother, self-employed nerd and I post about all kinds of things.  I have 4 series of blogs: Medical Billing, Children’s Literacy, Photography, and just Mom Stuff. I would love to share them all with you.

Please take a moment to comment or ask questions below.  You can also find me all over social media:

Twitter: WAHMCat & Medical Billing
Instagram: WAHMCat
Youtube: WAHMCat (I don’t have a video to go with this post, but I’m working on one – Still go subscribe! ☺)
Usborne: Usborne websiteFacebook Page
Photography: Shutterbug & Co.Facebook Page

Thanks for reading, commenting, sharing, following and subscribing.  You guys are the best.

Catsiggy

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