What is the Difference Between Allowed Amount and Paid Amount in Health Insurance?

Understanding key insurance terms like “allowed amount” and “paid amount” can help you better navigate your health coverage. While these two amounts are related, they have distinct definitions when it comes to how your claim is processed.

This article will explain allowed amount versus paid amount, how they impact your out-of-pocket costs, and why you may not always pay the allowed amount even after meeting your deductible.

Allowed Amount

The allowed amount, sometimes called the eligible expense or negotiated rate, is the maximum dollar amount your health insurer will pay for a covered medical service or treatment from an in-network provider. This is the foundation for how much you will owe.

Each insurance company negotiates contracted rates with doctors, hospitals, pharmacies, and other providers in their network. These pre-set allowed amounts are what your insurer uses to determine their payment responsibility.

For example, let’s say an in-network doctor charges $200 for a visit. But your insurance has negotiated an allowed rate of $150 for that service with that provider.

In this case, the allowed amount is $150.

Some key notes:

• The allowed amount may vary between in-network and out-of-network providers for the same services. In-network allowed amounts are typically lower.

• Providers agree to accept the allowed amount as full payment, so you are only responsible for any deductible and coinsurance or copays up to that allowed rate.

• Out-of-network providers may “balance bill” you for the difference between their full charges and the allowed amount set by your insurer.

• The allowed amount acts as the ceiling on what you and your insurance combined will pay.

Now let’s look at how the allowed amount impacts your out-of-pocket responsibility.

Allowed Amount and Your Cost Sharing

Your share of the allowed rate is based on your plan’s cost-sharing structure – namely the deductible and coinsurance or copay amounts.

For example, let’s say your plan has:

• A $1000 deductible
• 20% coinsurance
• A $150 allowed amount for a doctor visit

If you haven’t met any of your deductible, you pay the full $150 allowed amount. This goes toward your deductible.

But if you’ve already met your deductible, you pay 20% of $150, which is $30. The insurer pays the remaining $120 of the allowed charge.

So the allowed amount sets the basis for calculating how much you owe out-of-pocket before and after meeting any deductible. This ensures you and the insurance company together do not overpay providers.

Paid Amount

Now let’s turn to the paid amount. This is the actual dollar amount the insurance company ultimately pays the provider for a service.

In our example, if you had already met your deductible, the paid amount would be $120. That’s the remaining allowed charge after subtracting your coinsurance.

The paid amount can differ from the allowed amount in several scenarios:

• You haven’t met your deductible – In this case, the paid amount would be $0 until you reach your deductible. You pay the full allowed charge.

• You have coinsurance or copays – The insurer pays only their portion of the allowed rate after your cost sharing.

• You have other insurance – If another plan is primary, they pay first up to their allowed amount and your secondary insurer pays the balance, which is the paid amount.

• The provider offers a discount – Sometimes providers accept a lower paid amount than the allowed charge agreed to with the insurer. This further reduces the insurer payment.

• Claim adjudication – Coding errors, improper billing, mistaken patient liability, and other claims processing issues can lead to adjustments that alter the paid amount versus the initial allowed charge.

So while the allowed amount sets the maximum the provider can be paid, the paid amount reflects deductions for member cost sharing and any other adjustments during claims settlement.

Why Allowed and Paid Amounts Differ

At first glance, it may seem strange that the allowed amount and paid amount are not always identical.

Here are some reasons for this difference:

• Cost sharing – Your deductible and coinsurance are specifically intended to reduce the portion paid by insurance. Allowed amount includes the total before these reductions.

• Network discounts – Insurers negotiate overall discounts with in-network providers as part of contracting. Claims are paid at the reduced allowed rate, not the original charges.

• Bundling – Some services that used to be billed separately are now bundled into one allowed fee to simplify billing. This can result in lower payouts.

• Market power – Large insurers can leverage their membership size to negotiate allowed amounts below common charges in their geographic area.

• Cost reduction incentives – Insurers offer bonuses to providers who keep billed charges lower than typical costs for efficient care. This may enable the insurer to pay less than the allowed maximum.

• Errors and audits – Ongoing claims reviews can lead to take-backs of payments for services later deemed inappropriate, excessive, or coded incorrectly according to the details of the insurance contract.

While the allowed amount serves as the basis for member liability, the paid amount better reflects the insurer’s actual financial obligation once all discounts, cost-sharing, audits, and contract provisions are applied.

Impact on Out-of-Pocket Spending

Importantly, your deductible, copays, and coinsurance are always based on the allowed amount – not what the insurer ultimately pays. This protects you from overpaying if the paid amount is lower.

For example, if you have a 20% coinsurance:

• Allowed amount: $200
• Insurer paid amount: $150 (after negotiated discount)
• Your coinsurance is still 20% of $200, which is $40

So even though the insurer only paid $150, your cost sharing remains $40 based on the full allowed rate to maintain fairness.

Takeaways on Allowed vs. Paid Amount

• The allowed amount is the maximum your health plan will pay for a covered service with an in-network provider. It is the basis for calculating your cost sharing.

• The paid amount is what your insurer actually pays the provider after subtracting your deductible, coinsurance, discounts, and processing adjustments.

• It’s common for the allowed amount to exceed the paid amount on a claim. But your cost sharing is still based on the higher allowed rate.

• Knowing how to spot the allowed amount on your Explanation of Benefits statement helps you estimate what you’ll owe for healthcare.

Having a strong grasp of these key insurance terms can help you better understand and evaluate your medical bills and Explanation of Benefits statements. This allows you to be an informed advocate as you navigate the healthcare system.