Medical bills are often opaque, filled with jargon and numbers. When seeking care, patients typically encounter two primary documents: the provider’s bill (a request for payment) and the Explanation of Benefits (EOB) from the insurer. The EOB is not a bill, but it fully details the financial transaction between your healthcare provider and your insurance company. Understanding these components is the first step toward demystifying healthcare finance.
Identifying the Services and Charges
The initial section of a medical bill or EOB identifies the specific service provided, the date it occurred, and the initial charge. This section lists the patient’s name, the provider’s name, and the date of service, allowing for easy cross-referencing.
Each service performed, such as an office visit or a procedure, is represented by standardized medical codes. The Current Procedural Terminology (CPT) code is a five-digit number that describes what service was performed during the visit.
Accompanying the CPT code is the International Classification of Diseases, 10th Revision (ICD-10) code, which explains why the service was necessary by detailing the patient’s diagnosis. Both codes must be submitted to the insurer to justify the medical necessity of the treatment. The number listed next to these codes is the “Billed Amount,” which represents the provider’s standard charge before any insurance negotiations are applied.
The Insurer’s Financial Calculations
This section details how the insurance company determines the final payable amount, transitioning from the provider’s initial charge to the negotiated rate. This process begins by converting the “Billed Amount” into the “Allowed Amount.”
The Allowed Amount is the maximum dollar figure an insurer will pay for a specific CPT code, based on a pre-negotiated contract with the provider. This rate is usually lower than the provider’s Billed Amount, which is why the two numbers often differ. By agreeing to be “in-network,” the provider accepts this lower amount as payment in full.
The difference between the Billed Amount and the Allowed Amount is the “Contractual Adjustment” or “Contractual Write-Off.” This is the portion the provider must write off and cannot charge the patient. For example, if the provider bills $500 but the Allowed Amount is $350, the $150 difference is the contractual adjustment.
After applying the contractual adjustment, the insurer determines the “Plan Payment.” This is the portion the insurance company is responsible for paying to the provider. Before this payment is calculated, the patient’s financial responsibility—such as the deductible, copayment, and coinsurance—is subtracted from the Allowed Amount.
Understanding Your Final Responsibility
The final part of the medical bill or EOB itemizes the remaining balance the patient must pay, known as the patient’s financial responsibility. This amount is derived from the Allowed Amount after the insurer’s payment obligations are factored in. The first cost applied is the “Deductible,” which is the fixed amount a patient must pay out-of-pocket annually before the insurance plan begins coverage.
Once the deductible is met, “Coinsurance” may apply, representing the patient’s share of covered service costs, usually expressed as a percentage. For instance, 80/20 coinsurance means the insurer pays 80% of the Allowed Amount, and the patient pays 20%. A “Copayment” or “Copay” is a fixed dollar amount paid at the time of service for a specific visit type, owed regardless of the deductible status.
These payments constitute the final amount owed to the provider. For in-network providers, regulations prohibit “Balance Billing,” which is charging the patient for the difference between the Billed Amount and the Allowed Amount. Therefore, the patient’s total responsibility should only include the calculated deductible, copayment, and coinsurance amounts applied to the pre-negotiated Allowed Amount.