What are Allowed Amounts and Fee Schedule Rules?

Just imagine a situation, where you treat a patient, putting in your full effort to restore their healthy smile. The treatment is successful and you’re expecting to get a good payday for the service.

But, when insurance pays, the story is completely different. The payment doesn’t justify your service or even your costs.

It’s an issue practices face when they don’t clearly understand the mechanisms of allowed amounts and fee schedules in dental insurance.

The fact is that allowed amounts determine what payer reimburses you for a claim. Even a minor change in the reimbursement rate can impact your financial performance.

If you don’t clearly understand these terms, you may be writing off revenue and accepting underpayments without realizing it.

These issues occur when the reimbursement is lower than the billed charges. It hurts your profitability.

You might be wondering why that happens. To answer that, you need to know the structure of allowed amounts and fee schedules.

Curious about how these influence your cash flow? In this blog, we’ll discuss these key concepts and guide you through ways to reduce revenue loss, improve reimbursement, and take control of your practice’s finances with expert dental revenue cycle management services.

What are the Foundational Mechanics of Dental Reimbursement?

Before getting into the details of payer policies and reimbursement rules, let’s have a clear idea of the following terms:

Billed Amount vs. Allowed Amount

The billed amount is your standard practice fee for a procedure. Dental practices mostly set high billed amounts because most payers reimburse at lower contracted rates.

This fee reflects:

• Your overhead (ongoing operating expenses required to run the practice, excluding dentist compensation)
• Dental equipment and software costs
• Local fee of dentists in your area

The allowed amount, on the other hand, is the maximum reimbursement the payer considers for that procedure.

Example: You charge $150 for a routine dental cleaning, but the payer reimburses a maximum of $120 for the insurance claim. If you are an in-network provider enrolled with the payer’s PPO plan, you have to accept the $30 difference as a contractual adjustment. You have to write it off as it’s not collectible.

Contractual Adjustments 

Now that you know the gaps that exist between the billed and allowed amounts, take a step further and learn about contractual adjustments.

So, a contractual adjustment is the difference between your billed fee and the allowed amount.

For instance:

• Billed: $180
• Allowed: $160
• Adjustment: $20

For in-network providers, this $20 is written off and cannot be billed to the patient.

These changes add up over time and significantly lower your total income if not managed properly.

The Usual, Customary, and Reasonable (UCR) Paradigm

The term “Usual, Customary, and Reasonable” (UCR) refers to the dollar amount an insurance company sets as reasonable for a dental procedure in a specific geographic region.

The UCR rate is mostly calculated using data collected from various dental practices within a specific zip code or region. Here, the payer identifies the average cost and then sets a standard amount for a specific procedure. All that makes UCR the main factor in determining the allowed amount.

What are Dental Fee Schedules?

A contracted fee schedule is a complete list of the maximum reimbursement rates or allowed amounts that you agree to when you join a PPO or HMO network. These are set during the dental credentialing process.

Unlike UCR (Usual, Customary, and Reasonable) fees, which are based on regional averages, contracted schedules are fixed by the payers and do not adjust automatically for inflation.

Thus, fee schedules must be negotiated every now and then to keep your collections profitable with changing times and inflation.

Internal Practice Fee Schedule

The internal practice fee schedule (often called your UCR fee schedule) is the master list of prices your practice sets for its services. It represents the true value of your clinical expertise, overhead, and technology, without any insurance discounts.

Here, the practices determine a procedure’s fee themselves without any restriction from the payer. With that, you can manage your finances in a better way.

It’s important to update your fee over time as it compensates for:

• Inflation
• Rising staffing costs
• New technology investments

Setting higher fees in the internal practice schedule helps you easily cover these expenses as payers reimburse at discounted rates.

Note: If you don’t update your fees, you may end up being reimbursed at rates that no longer support your practice financially.

Contracted Fee Schedules

The contracted fee schedules are set by the insurance companies, which are different from the internal practice schedules. As costs increase with inflation, the practices need to negotiate rates after at least one year.

There are three types of insurance fee schedules:

PPO Plans

According to the National Association of Dental Plans (NADP), nearly 86% of the dental insurance market is PPO-based in the US. Since in-network PPO plans determine the fee schedules, it means insurers, not providers, largely control reimbursement limits.

Key features of the PPO-based fee schedules are as follows:

• Negotiated and discounted fees
• High patient volume
• Lower margins

So, the allowed amount and fee schedules in this plan are slightly lower owing to the high number of patients.

Indemnity FFS Plans

These are traditional plans that work on the fee-for-service (FFS) model. That means the fee is usually independent of the insurers, thereby making it more flexible. Similarly, the patients in this plan may have to pay a high out-of-pocket amount.

HMO Plans

The Health Maintenance Organizations (HMOs) utilize a capitation model (fixed monthly payment per patient), which makes the income predictable. Dentists are paid a fixed monthly amount per assigned patient, regardless of whether that patient seeks care.

Policies for these plans, which directly affect both fee schedules and allowed amounts, are influenced by regulatory bodies like the Centers for Medicare & Medicaid Services (CMS).

What is the Allowed Amount in Dental Insurance?

Like fee schedules, allowed amounts play an important role in revenue generation.

Want to know how it impacts the reimbursement mechanism? We’ll discuss that. But, before that, let’s understand this term.

Definition and Role in Reimbursement

The allowed amount is the maximum amount an insurance company pays to a dental practice for a procedure. It’s the ceiling set by the payer for a specific CDT code.

Example: If you perform a resin-based composite one-surface posterior (D2391) and your practice fee is $250, the insurers do not reimburse at this price. It is usually lower than the charges you have set. The insurance allowed amount is $180. Therefore, $180 is the total potential revenue for that service, including both the insurance payment and the patient’s portion. Here, it is the allowed amount.

How Are Allowed Amounts Calculated?

Allowed amounts aren’t random figures. To calculate these, consider the following parameters:

• PPO Contracts: The payer fixes the allowed amounts for reimbursement with the provider for in-network services.
• Geographic Averages: Fees are adjusted based on regional cost differences like location and market conditions.
• Historical Claim Data: Payer uses past billing and payment trends to set realistic reimbursement levels.
• UCR Benchmarks: Out-of-network payments are based on a statistical UCR rate in the practice’s area

Understanding each factor makes it easier for the practice to calculate the allowed amount efficiently.

How to Read an EOB for Allowed Amounts?

The Explanation of Benefits (EOB) is a statement by the payer, in which they explain what they cover and what the patient has to pay. They also mention denials or adjustments if there are any.

To verify if you are being paid correctly, look for these three pillars on your EOB:

• Billed Charge: Your standard fee.
• Allowed Amount: The total dollar amount the payer recognizes for the service.
• Contractual Adjustment: The amount you must write off (billed minus allowed).

The Golden Rule: The allowed amount is always the sum of the insurance payment and the patient’s responsibility (deductible and co-insurance). If these two numbers don’t add up to the allowed amount on your fee schedule, you are likely dealing with an underpayment.

How Do Allowed Amounts Impact Dental Practice Revenue?

Allowed amounts determine what you actually earn, independent of what you billed. It plays a central role in managing the dental revenue cycle. 

If you don’t negotiate the right fee, you can face underpayments, and experience higher accounts receivable, leading to revenue loss.

So, it’s important to set allowed amounts that help you cover your expenses and earn profits.

How to Negotiate Fee?

It’s important to negotiate fee and set reasonable reimbursement rates to optimize revenue.

Why is Fee Schedule Negotiation Important?

Many dentists wrongly assume PPO fee schedules are fixed. However, these can often be negotiated. Even a very little increase in the amount can make a significant difference to the practice’s revenue. 

For example, if you successfully get an increase of $20 per crown and you conduct 500 procedures annually, you will add $10,000 in additional revenue.

Data-Driven Negotiation Approach

To negotiate fee schedules effectively, track your:

• Top procedure codes
• Current allowed amounts
• Total write-offs

This practice is effective in helping you find which codes generate more revenue or have highest volume, and how the current fee schedule increases write-offs, affecting your finances.

By using the data, you can negotiate lucrative contracts with the payer, as these steps are directly linked to revenue changes through the fee schedule and allowed amount.

Factors that Strengthen Negotiation Power

Leveraging your practice strengths favors your negotiating position. This includes:

• High patient volume
• Limited provider competition in your area
• Efficient electronic billing systems

With that, you can prove to the payer that your billing processes and patient care are excellent, and you’re also contributing to more revenue opportunities for the payer.

It helps you win at the negotiation table.

PPO Fee Schedule Negotiation Letter

This is a template of a fee schedule negotiation letter to the payer, which you can modify according to your needs.

Instructions: Copy and paste the above text into your practice letterhead. Fill in the bracketed placeholders with your practice’s specific data.

How to Optimize Fee Schedules for Better Profitability?

Fee schedules can be optimized for better profitability. In order to ensure an optimized procedure fee, do the following.

Annual Review

You must review your contracted fee schedules every year, because payer’s reimbursement rates might not change, but inflation drives a spike in prices. If the rates don’t justify your clinical excellence and practice expenses, you must negotiate them on time.

Billing Audit

Getting paid by the payer isn’t enough. Conduct a billing audit of your dental fee schedule to check if the rates are fair and need improvement. 

Audit helps you know which procedures offer high reimbursement and where you’re losing money. 

It also helps you find areas where you can negotiate better rates with payer for profitability.

You can also compare fee schedules with multiple payers to see where you’re earning more and where you’re losing revenue.

All these factors help you make data-driven decisions and negotiations with the payer.

Outsourced Credentialing

When you partner with outsourcing companies that offer dental credentialing services, it’s easy to negotiate with the payer.

These companies hire credentialing experts, who just don’t help you get enrolled, but also assist you in finalizing payer contracts. These agreements guarantee profitable reimbursement rates for your practice.

They also renegotiate if the fee schedules aren’t justified. Credentialing partners act on your behalf and contest your case, helping you secure high-paying contracts.

Tools and Technology

Technology has significantly changed dental revenue cycle management. With the incorporation of artificial intelligence (AI) in a billing system, it’s easy to track financial performance, analyze fee schedules, and get data that helps you decide whether you need to renegotiate rates.

For instance, if you use a practice management system, you can track all the important data and metrics like allowed amounts, payment trends, and outstanding balances.

This data is strong evidence, which you can present to the payer, and inform them how an outdated fee schedule isn’t matching up with the inflation, and needs adjustment for better financial outcomes.

But here is the issue: Most small and new dental practices lack these advanced tools. In such cases, you can outsource dental billing to an efficient company like TransDental to streamline fee schedule analysis and the entire dental RCM.

Conclusion

Allowed amounts and fee schedules are not only technical terms in dental billing; rather, they are the major indicators of the financial wellness of the practice. They depend on the types of insurance plans and the nature of the contracts with the payers. Clearly examining the factors influencing them helps you improve revenue predictability, reduce write-offs, and strengthen financial performance. 

Make sure to secure contracts with high-paying reimbursement rates that help you manage your practice expenses smoothly and drive revenue growth with profits.

Frequently Asked Questions (FAQs)