According to the St. Bernardine Medical Center, a contractual adjustment is part of the bill that a hospital has agreed not to charge a patient because of billing agreements with the patient's insurance company. It is the most common type of adjustment made by medical providers.
A contractual adjustment shows up on a billing statement as an adjustment required, and it decreases the balance. When a medical provider accepts an insurance plan, the contract includes details such as the amount the insurance company pays the provider for certain procedures. Since the provider charges more than what the insurance company agrees to pay, the amount that is paid by the company is known as an allowable amount, and the amount above that is the reduction, made by the provider, called contractual adjustment. Providers that participate in this agreement believe that the broader access to members is worth the contracted rates on services. Additionally, it ensures that providers are paid a significant portion of the fee, which patients without insurance cannot afford.
Contractual agreements are only made on services covered by the insurance company. A patient who undergoes a procedure that is not covered must pay the full amount charged by the medical provider without any contractual agreement to limit the cost.