There are many items that are confusing in the world of medical billing. One of the most confusing areas for individuals that are new to the business side of medicine is the idea of medical billing allowables. There are not many businesses where a bill is sent out for much more than one would expect to collect. In most business if you bill $100 then you expect to collect $100. In the business of medicine a bill for $100 is often sent out with the expectation that only $50, $30 or even less will be collected. Why?

This is primarily done for four reasons:

1. Simplicity. Not all payers pay the same amount for a medical procedure. If a practice tried to bill each insurer and each patient exactly what they expected to collect it would become an all consuming task to maintain the multiple fee schedules. The practice could easily end up with more than 25 fee schedules. In addition, all of the fee schedules would need on-going updating since many plans change the amount they will pay annually (and they change their fee schedules at different times throughout the year).

2. Revenue Enhancement. Medical practices will often see patients with insurance plans for which the provider is out of network. Some of these plans pay a percentage of billed charges. So, you do not want to set fees too low because for the plans that pay a percentage of billed charges the practice would leave money on the table that they could be collecting.

3. Comparability. If a practice continually changes it fee schedules (see point 1 above) then comparing charge volumes across months and years becomes less meaningful. For example, does the fact that charges are up 10% this June versus last mean more patients are being seen or that the fee schedule has changed? There are other measures that are easily decoupled from charge volume, such as patient encounters, but charge volume is the fastest and easiest metric for most billing software and departments to produce.

4. Compliance. It is illegal for a medical practice that accepts Medicare to charge any other entity a lower fee than they charge Medicare. They can always give discounts, but the fee charged must not be lower. By charging all plans and individuals the same amount, the risk of unintentionally running afoul of this rule is eliminated.