--- title: "What is contractual adjustment?" description: "Contractual Adjustment explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero." url: https://ledgerbpo.com/glossary/contractual-adjustment/ updated: 2026-09-11 publisher: LedgerBPO (SS Support Network LLC) language: en-US --- # What is contractual adjustment? Glossary A contractual adjustment is the difference between a healthcare provider's billed charge and the amount its contract with an insurance payer allows, and it is written off rather than billed to the patient. It reflects a negotiated rate, not a collection failure. Updated September 2026 ## How contractual adjustment works Every payer a provider contracts with sets an allowed amount for each procedure code, usually lower than the provider's standard billed rate. When a claim is processed, the payer's remittance advice shows the billed charge, the allowed amount and the contractual adjustment between them, alongside whatever it actually pays and the patient's share. Because the adjustment is a term of the payer contract rather than a bad debt, it posts to a separate contractual adjustment account, not to bad debt expense, and it should never appear on a patient statement as an amount owed. Practices track contractual adjustments by payer to spot underpayments and to negotiate future contract rates. Some practices also compare contractual adjustments against the fee schedule published in the payer contract each quarter, since payers occasionally underpay relative to what the contract specifies, and catching this early protects revenue that would otherwise be missed. ## Example A clinic bills $500 for a procedure. Its contract with the insurer sets the allowed amount at $350, so $150 is posted as a contractual adjustment and written off immediately. The insurer pays $280 of the $350 allowed amount, leaving a $70 patient copay. The original $500 charge never becomes patient responsibility beyond that $70. If the clinic later finds the insurer actually underpaid by $20 against the contracted rate, the billing team files an appeal referencing the contract terms rather than writing the shortfall off as a further adjustment. ## Contractual adjustment in QuickBooks Online vs Xero Not software-specific: contractual adjustments are usually calculated automatically by the practice management or medical billing system when it posts an electronic remittance advice, rather than typed manually into QuickBooks Online or Xero. The accounting system typically receives a summarized batch entry for revenue, adjustments and patient balance rather than a line per claim. ## Related terms - [Write-off](https://ledgerbpo.com/glossary/write-off/) - [ERA](https://ledgerbpo.com/glossary/era/) - [EOB](https://ledgerbpo.com/glossary/eob/) - [All terms](https://ledgerbpo.com/glossary/) ## How LedgerBPO handles contractual adjustment Our medical billing team posts payer remittances, applies the correct contractual adjustment for each payer contract and reconciles the resulting patient balance, so adjustments are recorded consistently rather than lumped in with bad debt. We flag payers whose payments run below the contracted allowed amount so you can follow up. [Claims paid, AR down, books reconciled](https://ledgerbpo.com/services/medical-billing/) Next step ## Books closed. Invoices paid. Every month. Tell us what is going on with your books or billing. You will hear from a named person within 1 business day, with a custom quote and a plan for the first close. - Reply from a named person within 1 business day - No setup fee, month-to-month - Your software, your data, no lock-in Start with a custom quote [Get a custom quote](https://ledgerbpo.com/get-a-quote/) [Book a 20-minute call](https://ledgerbpo.com/book-a-call/) Or call [+1-657-777-0006](tel:+16577770006) during US, UK or Australian business hours. --- Source: https://ledgerbpo.com/glossary/contractual-adjustment/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt