What Does Allowed Amount Mean in Health Insurance?

Understanding health insurance terms is important for managing healthcare expenses. The “allowed amount” is a fundamental concept that directly influences how your health plan processes claims and determines your financial responsibility. Grasping this concept provides clarity on how your medical bills are calculated and your potential out-of-pocket costs.

Defining the Allowed Amount

The allowed amount in health insurance refers to the maximum sum an insurance plan will pay for a covered healthcare service or supply. This figure is often known by other names, such as the “approved amount,” “eligible expense,” or “negotiated rate.” It is frequently less than the total amount a healthcare provider initially “bills” for a service. When a provider submits a claim, the insurance company reviews it against its established allowed amount. Any portion of the billed amount exceeding the allowed amount for in-network providers is typically written off by the provider and cannot be charged to the patient.

How the Allowed Amount is Set

Insurance companies primarily determine the allowed amount through negotiated rates with in-network healthcare providers and facilities. These negotiations result in pre-agreed prices for medical services. When you receive care from an in-network provider, your insurance company will pay based on these established rates, not the provider’s standard billed charges. For services where a negotiated rate may not exist, or for out-of-network care, insurers may use a “usual, customary, and reasonable” (UCR) charge methodology. This approach considers the typical charge for similar services in a specific geographic area, and the UCR amount then becomes the allowed amount, forming the basis for the insurer’s contribution.

Your Share of the Cost

The allowed amount directly impacts your out-of-pocket expenses for medical care. When you receive a covered service, your deductible, copayment, and coinsurance are applied to this allowed amount, not the higher amount initially billed by the provider. For instance, if a service has an allowed amount of $500 and your plan has a 20% coinsurance, you would pay $100 (20% of $500) after meeting your deductible. If a provider bills $700 for a service with an allowed amount of $500, and your deductible has been met, your 20% coinsurance would be based on the $500 allowed amount, making your share $100. The $200 difference between the billed amount and the allowed amount is a contractual adjustment that in-network providers absorb and cannot charge to you. This mechanism protects you from paying the full cost of care when using in-network providers.

When Rules Differ

The standard rules regarding allowed amounts can differ significantly when you receive care from out-of-network providers. For such services, the allowed amount may still be based on UCR charges, which might be lower than the out-of-network provider’s billed amount. You may be responsible for the difference between the provider’s billed amount and the insurer’s allowed amount, known as balance billing. For example, an out-of-network provider might bill $1,000 for a service, but your insurer’s UCR allowed amount might only be $600, leaving you responsible for the remaining $400 after your deductible and coinsurance. However, the No Surprises Act generally prohibits balance billing for emergency services and certain non-emergency services provided by out-of-network providers at in-network facilities.