Allowed Amount on a Health Insurance Statement

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You're not the only one confused by the allowed amount on your health insurance explanation of benefits. Image © John Clines/E+/Getty Images

When you run across the term allowed amount on your health insurance explanation of benefits, it can cause some confusion. It’s the total amount your health insurance company thinks your health care provider should be paid for the care he or she provided. The allowed amount is handled differently if you use an in-network provider than if you use an out-of-network provider.

Allowed Amount With In-Network Care

If you used a provider that’s in-network with your health plan, the allowed amount is the discounted price your managed care health plan negotiated in advance for that service. Usually an in-network provider will bill more than the allowed amount, but he or she will only get paid the allowed amount. You don’t have to make up the difference between the allowed amount and the actual amount billed when you use an in-network provider; your provider has to just write off whatever portion of their billed amount that's above the allowed amount. That’s one of the consumer protections that comes with using an in-network provider.

However, this isn’t to say you’ll pay nothing. You pay a portion of the total allowed amount in the form of a copayment, coinsurance, or deductible. Your health insurer pays the rest of the allowed amount.

Anything billed above and beyond the allowed amount is not an allowed charge. The health care provider won’t get paid for it. If your EOB has a column for the amount not allowed, this represents the discount the health insurance company negotiated with your provider.

To clarify with an example, maybe your doctor's standard charge for an office visit is $150. But she and your insurance carrier have agreed to a negotiated rate of $110. When you see her for an office visit, her bill will show $150, but the allowed amount will only be $110. She won't get paid the other $40, because it's above the allowed amount. The portion of the $110 allowed amount that you have to pay will depend on the terms of your health plan. If you have a $30 copay for office visits, for example, you'll pay $30 and your insurance plan will pay $80. But if you have a high-deductible health plan that counts everything towards the deductible and you haven't yet met the deductible for the year, you'll pay the full $110.

Allowed Amount With Out-Of-Network Care

If you used an out-of-network provider, the allowed amount is the price your health insurance company has decided is the usual, customary and reasonable fee for that service. An out-of-network provider can bill any amount he or she chooses, and does not have to write off any portion of it. Your health plan doesn’t have a contract with an out-of-network provider, so there’s no negotiated discount. But the amount your health plan pays will be based on the allowed amount, not on the billed amount.

With an out-of-network provider, your insurer will calculate your coinsurance based on the allowed amount, not the billed amount. You’ll pay any copay, coinsurance, or out-of-network deductible due; your health insurer will pay the rest of the allowed amount.

How an out-of-network provider handles the portion of the bill that’s above and beyond the allowed amount can vary. In some cases, especially if you negotiated it in advance, the provider will waive this excess balance. In other cases, the provider will bill you for the difference between the allowed amount and the original charges. This is called balance billing and it can cost you a lot. In some circumstances, the balance bill comes as a surprise to the patient, because they were using an in-network hospital and didn't realize that one or more of the physicians (or other health care providers) who provided treatment were actually out-of-network.

Why do health insurers assign an allowed amount for out-of-network care? It’s a mechanism to limit their financial risk. Since health plans can’t control out-of-network costs with pre-negotiated discounts, they have to control them by assigning an upper limit to the bill.

Let’s say your health plan requires that you pay 50% coinsurance for out-of-network care. Without a pre-negotiated contract, an out-of-network provider could charge $100,000 for a simple office visit. If your health plan didn’t assign an allowed amount, it would be obligated to pay $50,000 for an office visit that might normally cost $250. Your health plan protects itself from this scenario by assigning an allowed amount to out-of-network services.

Unfortunately, in protecting itself from unreasonable charges, it shifts the burden of dealing with those unreasonable charges to you. This is a distinct disadvantage of getting out-of-network care and is the reason you should always negotiate the charges for out-of-network care in advance.

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