What Does Contractual Adjustment Mean in Billing?

Contractual adjustment is a phrase commonly used in health insurance when an insured person is covered by an individual or group health plan that involves a network of providers contracted by the insurer. Contractual adjustments generally reduce the amount of the service charge, thus reducing the amount owed on the claim.

Insurance networks such as the health maintenance organization and preferred provider organization plans have become increasingly common in the early 21st century. Many people are covered by group plans that are part of these insurance networks. The network consists of three parties in the insurance process -- the insurer, the insured and the providers. Each participant in the network generally benefits from the established provider network arrangement.

Just as the insurer and the policyholder establish a health insurance contract whereby the insurer promises certain benefit payments in exchange for premiums, the insurer and providers also have a contractual arrangement. Participating health care providers typically agree to become part of a insurance network in exchange for contractually agreed upon rates for certain services. Providers that participate believe the broader access to members is worth the contracted rates on services.

In many health care networks, member policyholders are not directly involved in the claims process. If the member gets a service covered by his health care plan, the provider usually bills the insurer and charges only the requisite co-pay and/or co-insurance owed by the provider. The provider usually submits the bill for the provider's standard rate for the service. Assuming the service is covered by the insurance contract, the insurer processes the claim at the agreed-upon service rate. The reduced amount between the provider bill and contract rate is discounted and called a contractual adjustment.

In general, the contractual adjustment simply denotes the amount the provider's fee is reduced based on their contract with the provider. Some providers prefer to avoid participation in certain insurance networks so they can charge their own rates. This usually means a reduction in patient markets as insurance networks are established to financially motivate the members to go to network providers. Network providers should not bill patients for the contractual adjustment amount, only for contract deductibles, co-pays and co-insurances as well as any uncovered service amounts.