Tuesday, May 1, 2012

Insurance Math: Insurance Paid vs. Insurance Allowed Amounts

I got a very good question from a reader that I thought I should add as a post since others may have the same question.

James asked “Very informative article. Truly appreciate the transparency and simplicity. You stated that hospitals write off the difference between what the insurance company actually pays and what the hospital actually charges? Wouldn't that mean that that the patient would not be billed after insurance is applied? Again, thanks for the explanation.”

James, thank you for your question. It is a very good one and the answer can be a little confusing. I hope I can be clear, but if not feel free to ask follow up questions as needed.

Insurance companies have a set amount that they will “allow” for medical services and procedures. The keyword is allow. The amount that the insurance allows is NOT always the same as the amount that the insurance will pay. The allowed amount is the total amount of money that the medical care provider can ultimately have. It is a combination of the amount the insurance will pay plus the amount for which the patient is responsible. The calculation would look like this:

Patient responsible amount + insurance payment = allowed amount

The patient must pay any difference between the allowed amount and the insurance’s payment amount. Like this:  Allowed amount – insurance payment = patient responsibility

The write off amount is the amount that exceeds the insurance company’s allowed amount. For example:

A medical care provider charges $1,000 for a service.
The insurance ‘allows’ $500
The insurance pays $250

Charge :                               $1000
Allowed amount:                   -$500
Write off:                               $500

Of the $500 that the insurance allowed, the insurance (in this hypothetical example) only pays $250, therefore, the patient is responsible to pay $250. The total of the patient payment plus the insurance payment matches the allowed amount of $500.

As you see in the example, the patient cannot be billed for the write off amount (e.g. the difference between the charge and the insurance’s allowed amount). The patient can, however, be charged for the difference between the insurance’s allowed amount and the amount that the insurance actually paid.

I hope this was clear. If you do have follow up questions, please feel free to post them and I will do my best to answer. Again, thank you for the question!


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