Revenue cycle
Expected reimbursement: how to calculate what a payer owes on each line
Expected reimbursement is what a payer should allow for a service under your contract or fee schedule. The allowed amount on the remittance is the payer's answer to that question. Calculating your own answer, line by line, is the only way to know whether theirs is right.
- Expected reimbursement
- What the line should be allowed: contract or fee-schedule rate, adjusted for the reductions that legitimately apply
- Contractual adjustment
- Billed charge minus allowed amount. Normal, usually CO-45 on the 835 (X12)
- Contract variance
- Allowed amount minus expected amount. Below zero is an underpayment
- Medicare base
- Physician Fee Schedule amount for the code, locality and year (CMS)
Three numbers that get confused
| Number | What it is | What it tells you |
|---|---|---|
| Billed charge | Your chargemaster price | Little about payment; most contracts pay less |
| Allowed amount | What the payer decided the line is worth | The payer's version of your contract |
| Expected amount | What your contract or fee schedule says the line is worth | Your version, and the benchmark for spotting short payments |
The contractual adjustment (billed minus allowed) is usually large and usually correct. The contract variance (allowed minus expected) is usually zero. When it isn't, there's money to recover.
How to calculate it, by contract type
Percent of Medicare
Many commercial and Medicare Advantage contracts pay a percentage of the Medicare Physician Fee Schedule. Start from the Medicare amount:
[(work RVU × work GPCI) + (practice expense RVU × PE GPCI) + (malpractice RVU × MP GPCI)] × conversion factor
The practice expense RVU differs by setting: the non-facility value for services in your office and the facility value for services in a hospital or ASC (CMS fee schedule documentation). Use the year of the date of service and your Medicare locality. CMS's fee schedule look-up tool shows the result, so you rarely need the formula itself. Then multiply by your contract percentage.
Fixed fee schedule
Some contracts attach their own rate table. The expected amount is the table rate for the code, modifier and setting. Check whether the table updates automatically each year or only when the contract is amended.
Percent of charges, and case rates
For a percentage of billed charges, multiply your charge by the percentage. For a case or global rate, the expected amount belongs to the whole episode, not to individual lines. Compare it with the sum of allowed amounts for the episode.
Adjustments to build in
- Multiple procedures. Medicare pays the highest-valued surgery at 100% and the second through fifth at 50% of the fee schedule amount (Claims Processing Manual ch. 12, §40.6). Contracts often adopt Medicare's rules or state their own. Apply the reduction in the right order, to the right lines.
- Modifiers. Some change the amount (an assistant at surgery, a professional component only); others exempt a line from a bundling edit. Your expected amount should follow the modifier as billed.
- Units. Multiply per-unit rates by units allowed, and check any unit limits in the contract.
- Sequestration. Traditional Medicare reduces payment by 2%, shown with reason code 253 (CGS Medicare). Whether a Medicare Advantage plan may apply it to you depends on your contract.
A worked illustration
Illustrative numbers, not real rates. A contract pays 120% of the Medicare Physician Fee Schedule. The Medicare non-facility amount for a procedure in your locality this year is $200, so the expected allowed amount is $240. The remittance shows an allowed amount of $216 with CO-45 for the rest of the charge. The contract variance is $216 − $240 = −$24, an underpayment of $24 on that line. $216 is 108% of $200, which suggests the payer is using last year's Medicare amount or a different percentage. If the payer repeats the same error on every claim for that code, the fix is the loaded rate.
Keeping the numbers current
Medicare updates the fee schedule each calendar year, and contracts change by amendment. Store each rate with the date it takes effect, and calculate every line using the rate in effect on its date of service. A rate table without dates will eventually make a correct payment look wrong, or a wrong one look right.
Questions
What is expected reimbursement in medical billing?
The amount a payer should allow for a line under your contract or the applicable fee schedule, after the reductions that legitimately apply. Comparing it with the allowed amount on the remittance is how you find underpayments.
What's the difference between a contractual adjustment and a contract variance?
A contractual adjustment is the gap between your charge and the allowed amount, and it's normal. A contract variance is the gap between the allowed amount and what the contract says the allowed amount should be. A variance below zero is an underpayment.
How do I calculate a percent-of-Medicare rate?
Look up the Medicare Physician Fee Schedule amount for the code, your locality, the date of service year and the facility or non-facility setting, then multiply by the percentage in your contract.
Does patient responsibility change the expected amount?
No. Deductible, coinsurance and copay change who pays, not how much is allowed. Compare expected with allowed, not with the payer's check.
Every payment, checked against your contract
Redress is building AI agents that work the practice's side of the revenue cycle: they check each payment against what you're owed and appeal what comes back short, and a person signs every appeal. We're early, and we'd like to hear how your team handles this today.
Talk to a founderLast reviewed October 19, 2026. This guide is general information about payer payment rules, not legal advice. Your payer contract and provider manual control the details; check them before you file.