How Does Insurance Determine the Allowed Amount?

When you receive medical care and file a claim with your health insurance company, you may notice that the amount your provider charged doesn’t match what your insurance paid. This difference is due to the allowed amount set by your insurer.

The allowed amount, sometimes called the eligible expense, is the maximum dollar amount an insurance company will pay for a covered health care service. Insurers use several factors to calculate allowed amounts for all procedures and services.

What is the Allowed Amount in Health Insurance?

The allowed amount is not the same as the amount your provider charges for a service. It is the negotiated rate your insurer has determined is reasonable for that service in your area.

For example, if your doctor charges $200 for an office visit but your insurance has an allowed amount of $150 for that service, your insurer will only pay benefits based on $150. This holds true whether you have in-network or out-of-network coverage.

The allowed amount puts a limit on how much insurers will pay healthcare providers. It protects insurance companies from being overcharged.

Without allowed amounts, medical providers could bill exorbitant rates and insurers would have to pay. Allowed amounts give insurers grounds to deny reimbursing costs they deem above fair market value.

How Insurers Set Allowed Amounts for Medical Services

Insurance companies use several methods to set allowed amounts for all medical procedures and services:

• Review of provider charges – Insurers look at the rates charged by doctors, hospitals, labs, and other providers in a geographic area to determine averages.

• Negotiated discounts – For in-network providers, allowed amounts are discounted rates negotiated in provider contracts.

• Medicare prices – Government-set Medicare fees are used as a benchmark for pricing. Many allowed amounts are a percentage of Medicare rates.

• Proprietary databases – Large insurers maintain fee schedule databases based on local market research.

• Doctor input – Some insurers survey doctors to help set usual, customary, and reasonable rates by procedure.

Several factors determine specific allowed amounts for a service, including:

• Location – Rates in rural areas differ from cities.

• Facility type – Hospital outpatient department rates often vary from private offices.

• Provider credentials – Allowed amounts may be higher for specialists versus general practitioners.

• Service complexity – More complex procedures have higher allowed amounts.

• Market competition – Areas with fewer providers may have higher allowed amounts.

Insurers regularly review and update their allowed amount data to account for changing market conditions and new services. Most insurers will not disclose exactly how they determine allowed amounts, considering it proprietary information.

How In-Network and Out-of-Network Allowed Amounts Differ

The way allowed amounts work depends on whether your provider is in your plan’s network or not.

In-Network Allowed Amounts

For in-network providers, the allowed amount is a pre-negotiated rate between the insurer and that specific provider. These negotiated discounts are often 20-30% below what out-of-network providers in the area charge.

As part of joining an insurer’s network, providers agree to accept the in-network allowed amount as full payment for covered services to plan members.

Providers cannot bill you for the difference between their typical fee and the in-network allowed amount. This protects patients from “balance billing” by in-network providers.

The trade-off for providers is that being in-network gives them access to the insurer’s covered members.

Out-of-Network Allowed Amounts

Out-of-network allowed amounts are set unilaterally by the insurer based on what they determine to be “usual, customary, and reasonable” rates in that market.

Because no contract exists between your insurer and out-of-network providers, the providers can bill you for amounts above the allowed amount. This is called balance billing.

For example, if your out-of-network doctor’s fee is $200 but your insurer’s allowed amount is $150, your doctor can bill you the $50 difference. The insurer will only pay benefits based on their allowed rate.

Certain insurance plans like HMOs and EPOs do not cover out-of-network care except in emergencies. Other plans like PPOs allow out-of-network care but at a higher cost to consumers through balance billing.

Why Do Allowed Amounts Matter?

The allowed amount directly impacts your out-of-pocket costs and total financial responsibility when you receive medical care. Understanding how allowed amounts work can help you estimate what you’ll owe and avoid unexpected bills.

In-Network Services

For in-network care, you only have to pay your cost-sharing like copays, deductibles, and coinsurance based on the allowed amount. Your insurer pays the rest of the allowed rate directly to your provider.

This protects you from paying any balance above the allowed amount when using in-network doctors and facilities.

Out-of-Network Services

For out-of-network care, you pay your cost-sharing based on the allowed amount plus any balance billing from the provider. Balance bills represent the gap between the out-of-network provider’s full charges and the insurer’s allowed amount.

Depending on the service, balance bills can range from a few dollars to thousands of dollars in unexpected medical costs not covered by your benefits.

How to Estimate Your Costs Using the Allowed Amount

You can get a reasonable estimate of what you will owe for a planned medical service if you know your out-of-pocket costs and the allowed amount set by your insurer.

Follow these steps to estimate your costs:

1. Verify network status – Check if the provider and facility are in your plan’s network.

2. Know your cost-sharing – Determine the copay, coinsurance, or deductible amount you’ll owe based on your policy.

3. Get allowed amount – Contact your insurer to find out the allowed amount for the specific service and provider.

4. Calculate your portion – Use the allowed rate to estimate your copay/coinsurance/deductible owed.

5. Ask about balance billing – If using an out-of-network provider, ask if they will balance bill you or accept the allowed amount as payment in full.

Doing this exercise for planned procedures can help avoid surprise medical bills. Just remember that actual billed charges may differ somewhat.

How to Dispute an Allowed Amount

In some cases, you may feel the allowed amount set by your insurer for a service is unreasonably low. This can happen with out-of-network care when balance bills are excessive.

If you wish to dispute an allowed amount or balance bill from an out-of-network provider, you have a few options:

• File an appeal with your insurance company requesting a higher benefits amount.

• Negotiate with the provider to reduce their charges and accept the allowed amount as payment in full.

• Use a medical bill negotiator to negotiate on your behalf.

• For large balance bills, consult legal counsel about your options.

Appealing directly to your insurer or negotiating with the provider yourself tends to be the most efficient options. Getting the provider to accept the allowed amount as payment in full eliminates the balance bill.

The Bottom Line

Allowed amounts are a critical component of health insurance policies. Insurers use them to limit payouts to in-network rates and usual and customary charges for out-of-network care.

Knowing the allowed amount for a planned medical service lets you more accurately estimate your out-of-pocket costs. This can help you budget for care and avoid unexpected balance bills.

Being aware of how your insurer sets allowed amounts allows you to maximize your benefits when you need medical care. You can choose cost-effective in-network providers when possible and dispute excessive out-of-network charges that arise.