Understanding Your Reimbursement
When your revenue cycle can't afford to stop.
What Reimbursement Actually Means
Your practice bills a charge for every service it provides. But the amount you actually collect is almost never that charge. Reimbursement is the net result of a series of calculations -- what was billed, what the payer allows, what they paid, and what the patient owes -- that together determine how much revenue your practice actually receives.
Understanding this flow is not just an accounting exercise. It shapes how you set fees, how you evaluate payers, and how you recognize when your revenue cycle is underperforming.
The Reimbursement Flow for a Single Claim
Every claim moves through the same basic sequence before money reaches your practice:
The $88 difference between your charge and the allowed amount is your contractual adjustment -- it is written off per your agreement with the payer. It is not lost revenue. It was never collectible under your contract.
The goal is to collect 100 percent of the allowed amount -- not 100 percent of your billed charge. Your net collection rate measures exactly that.
How Payers Determine What They Pay
Different payers calculate reimbursement in different ways. Understanding the method matters, because the same service can pay very differently depending on who is covering the patient.
The Medicare Payment Formula
Medicare's formula is the foundation that most other payer rates are built around. Even if you do not see many Medicare patients, understanding it helps you benchmark what commercial payers are offering relative to a known standard.
In plain terms: Medicare assigns a relative value to every procedure code, adjusts it for the cost of practicing in your geographic area, then multiplies by a national dollar rate. The CPT code you submit determines which RVU applies -- which is why accurate coding directly affects your reimbursement.
Why Your Fee Schedule Matters Even When Payers Set the Rate
Some practices assume their fee schedule does not matter much because payers pay based on their contracted rate regardless. That is mostly true -- but not entirely.
- Some commercial payers pay the lesser of your charge or their contracted rate. If your fee is lower than the allowed amount, you leave money on the table permanently
- Out-of-network claims are often paid as a percentage of billed charges -- a low fee schedule costs real revenue here
- Self-pay and uninsured patients are affected directly by your charge master
Most practices set fees at 200 to 400 percent of the Medicare allowed rate. This ensures you are never accidentally billing below what any payer would have paid, while maintaining a consistent, defensible fee structure across all payers.
Comparing Payer Performance
Not all payers are equal. The same therapy visit can yield very different reimbursement depending on which plan is covering it. Knowing how your payers stack up against each other -- and against Medicare -- gives you leverage at contract renewal time and helps you understand which payer mix is actually driving your revenue.
| Payer Type | Typical Rate Relative to Medicare | Key Characteristic |
|---|---|---|
| Medicare (traditional) | Baseline (100%) | Fastest payer; predictable; 12-17 day turnaround for clean claims |
| Medicare Advantage | Varies by plan | Administered by commercial payers; follow commercial payer rules |
| Commercial (in-network) | Usually 110% to 150%+ | Negotiated rate; highest variation across payers |
| Medicaid | Often below Medicare | State-administered; lowest rates; slowest payment cycles |
| Workers Compensation | Varies by state fee schedule | Different billing rules; may use proprietary codes |
What Can Reduce Your Actual Reimbursement
Even when everything is coded correctly and submitted on time, several factors can cause you to collect less than the contracted rate:
- Underpayments -- payer pays below their own contracted rate; only caught if fee schedules are loaded and someone is reviewing variances
- Bundling -- payer combines multiple service codes into one payment at a lower rate, often without notice
- Incorrect code selection -- the wrong CPT code maps to a lower RVU and therefore a lower allowed amount
- Modifier errors -- missing or incorrect modifiers can reduce payment or trigger a denial
- Place-of-service mismatches -- billing the wrong setting can change the reimbursement rate significantly
Revenue leakage from underpayments and bundling is largely invisible unless someone is actively comparing what was paid to what was contracted. Quarterly audits of your highest-volume CPT codes by payer are the minimum standard.
Round 3 in Review
This module closes out Round 3. Across these six modules, you have built a working understanding of the complete payment cycle -- from the moment a claim leaves the practice to the moment the account is resolved:
Check Your Understanding
Answer all three questions correctly to earn your Round 3 certificate.
1. Your practice bills $200 for a service. The payer's contracted allowed amount is $112. They pay $89.60 and the patient owes $22.40. What is the contractual adjustment?
2. What does the Medicare payment formula use to calculate the allowed amount for a procedure?
3. A payer consistently pays $5 less than the contracted rate for your most common therapy code. No one notices because it looks like a normal contractual adjustment. What should be in place to catch this?
You completed all six modules in Round 3. Your certificate is ready below.
Claim Your Certificate →