What is Contractual Adjustment?
Also called: contractual write-off · allowed amount adjustment
Collapsing contractual adjustments and write-offs into one bucket is one of the most common accounting errors in physician practices, and it conceals exactly the losses you would want to see: denied claims abandoned, balances never pursued, underpayments never challenged.
Contractual adjustments carry CO group codes on the remittance. Anything posted as an adjustment without a corresponding CO code deserves a second look.
Primary sources
Where "Contractual Adjustment" is defined by the bodies that set the rules, rather than by us.
- Medicare Physician Fee Schedule lookup (opens in a new tab)
Centers for Medicare & Medicaid Services — Official allowed amounts by CPT/HCPCS code and locality. The reference point most commercial contracts are written against as a percentage.
- Claim Adjustment Reason Codes (CARC) (opens in a new tab)
X12 — The authoritative, maintained CARC list. Our denial code lookup explains these in plain English; X12 is where the canonical definitions live.
Last reviewed August 20, 2026
Related terms
Payment Posting
Payment posting is the recording of payer and patient payments against the correct claims and service lines, including contractual adjustments, write-offs and patient responsibility. Done well it reconciles to the bank deposit; done poorly it corrupts every AR and denial report downstream.
Underpayment
An underpayment is a claim paid below the contracted allowed amount. Unlike a denial it produces no alert, posts cleanly, and closes the claim — which is why systematic underpayment can run for years without anyone noticing. Detection requires comparing every payment against a loaded fee schedule.
Allowed Amount
The allowed amount is the maximum a payer recognizes for a covered service under its contract with the provider. It sets the ceiling on total payment — payer portion plus patient responsibility — and the difference between billed charge and allowed amount becomes a contractual adjustment.
CARC
A claim adjustment reason code explains why a payer adjusted or denied a payment. Maintained by X12, each CARC carries a group code — CO for contractual obligation, PR for patient responsibility, OA for other adjustment — which determines whether the balance may be billed to the patient.
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