Contractual adjustment: the gap between what you billed and what the payer allows
Overview
A contractual adjustment is the part of your billed charge a payer will not pay because its fee schedule or contract allows less. Remittances usually show it as group code CO with reason code 45. You absorb it: Medicaid treats its payment, plus any cost sharing the plan requires, as payment in full. Still check each one against the rate you expected, because an underpayment can hide inside it.
On this page
Billed, allowed, adjusted, paid
Every paid line on a remittance follows one piece of arithmetic. Your billed charge, minus the contractual adjustment, equals the allowed amount. The allowed amount, minus anything the rider owes, equals what the payer sends you.
Take a made-up example. A wheelchair van trip is billed at $95.00, and the payer’s fee schedule allows $70.00 for the base rate and miles together. The remittance shows a $25.00 contractual adjustment and a $70.00 payment. Nothing is wrong with that claim, and nothing is left to collect.
The allowed amount comes from the payer: a Medicaid fee schedule, a broker or plan contract, or a rule such as lesser-of pricing. Arkansas’s transportation fee schedule says the state reimburses the lesser of the amount billed or the Medicaid maximum. Under that kind of rule, a charge below the maximum produces no adjustment at all, which is why the usual and customary charge you set still matters. The remittance advice guide shows how adjustments roll up into the deposit.
How it reads on an 835
On an electronic remittance, the adjustment sits next to the charge and the payment for each service line. Nevada’s 835 companion guide (updated July 6, 2026) maps the pieces: the submitted line charge, the line paid amount, and an adjustment amount equal to the difference between the line’s billed charge and what Medicaid paid.
The reason code is 45: “Charge exceeds fee schedule/maximum allowable or contracted/legislated fee arrangement.” X12 attaches three usage rules to it. It goes only with group code CO or PR, depending on who is liable. It cannot equal the whole charge. And it must not repeat reductions a prior payer already took. The claim adjustment reason codes entry covers the group codes in full.
Read the remark codes as well. Nevada’s guide says that when a line has more than one problem, only the first reason code goes into the adjustment segment and the rest are sent as remark codes. A single CO-45 line can therefore carry more of a story than its code shows.
Adjustment or underpayment?
A contractual adjustment should equal your charge minus the rate you expected for that payer, code, and number of units. When it is bigger, either the rate is not what you have on file or something else on the line was reduced, and the difference is worth a call. Common causes:
- A rate you did not know changed. Texas lists claims adjusted because of a rate change with EOB 01154, “This adjustment is a result of a rate change.”
- A code without a rate yet. Texas denies claims for new HCPCS codes as pending a rate hearing (EOB 02008), then reprocesses them on its own once the rate is set.
- Units or level of service changed. Indiana’s claim edits can cut back the units billed on a line. A mileage line paid for fewer miles, or a base rate priced at a lower level of service, leaves a bigger gap between charge and payment.
- A payer-wide correction. States sometimes reprice a batch of claims at once. The guide to Medicaid mass adjustments explains how those appear.
Checking every line by hand is slow. A simpler test is to compare each payer’s total allowed amount for the week against what your rate sheet says it should have been, and dig in only when the two disagree.
Who absorbs it
The group code answers this. CO stands for Contractual Obligation, a reduction that comes from your contract or the payer’s rules rather than from the rider’s share. For Medicaid riders, 42 CFR 447.15 settles the question regardless of code: the agency’s payment, plus any cost sharing the state plan requires, is payment in full, so the remainder cannot be billed to the rider.
Post the adjustment when the payment arrives, on its own line, separate from write-offs and bad debt. The accounts receivable guide covers write-off rules for balances that truly go uncollected.
Knowing what each payer should pay
In HealthRide, every payer has its own rate schedule, and each trip is priced against it at booking. For any date range, the payer summary report lists each payer’s billed total and open balance, the expected figure to hold a payment against.
Frequently asked questions
- Why was there no adjustment when the payer paid my full charge?
- Because your charge was at or below the allowed amount. Some Medicaid programs pay the lesser of your billed charge or their maximum, and Arkansas states this on its transportation fee schedule. A line that pays in full with no adjustment can mean your price is below the payer's rate and you are leaving money unbilled.
- Who pays the contractual adjustment on a Medicaid ride?
- You do, not the rider. Under 42 CFR 447.15, a provider taking part in Medicaid must accept the agency's payment, plus any deductible, coinsurance, or copayment the state plan requires, as payment in full. The difference between your charge and the allowed amount stays with you. Texas makes the same point for new codes still waiting on a rate: the client cannot be billed for those services.
- Does a secondary payer show the primary''s reduction as CO-45?
- It should not. The X12 rules for reason code 45 say it must not repeat contractual reductions that came from a prior payer's decision. The secondary payer reports the effect of the primary's payment and adjustments under reason code 23, which X12 reserves for group code OA.
