Medicare's Allowed Amount Is the Price Medicare Sets, Not What Your Doctor Charges

The allowed amount is the maximum dollar figure Medicare will pay for a specific service — a doctor visit, a lab test, an X-ray, surgery. Medicare sets this price itself, based on a formula that looks at what the service costs to deliver, what similar services cost in your region, and what Medicare paid for the same thing last year. Your doctor's actual bill might be higher, lower, or exactly the same as the allowed amount. What matters is that Medicare will never pay more than the allowed amount, and you are responsible for any difference between what Medicare pays and what your doctor charges.

The allowed amount is different from your copay, coinsurance, or deductible. Those are your share of the allowed amount. If the allowed amount for an office visit is $100, your copay might be $20, and Medicare pays $80. If your doctor charges $150 but the allowed amount is $100, Medicare still pays only $80 (after your copay), and your doctor can bill you for the extra $50 — unless your doctor is in-network and has agreed to accept the allowed amount as payment in full.

Key Takeaways

  • Medicare sets the allowed amount for each service using a formula based on regional costs and historical data, and this amount is published in the Medicare Fee Schedule.
  • Your doctor's bill can be higher than the allowed amount, and you may owe the difference if your doctor does not accept Medicare's allowed amount as full payment.
  • In-network doctors agree to accept the allowed amount as payment in full, so you pay only your copay or coinsurance.
  • Out-of-network doctors can charge more than the allowed amount, and you are responsible for the overage on top of your normal cost-sharing.
  • The allowed amount changes every year and varies by location, so the same procedure costs different amounts in different states or regions.

How Medicare Calculates the Allowed Amount

Medicare uses a system called the Resource-Based Relative Value Scale (RBRVS) to set allowed amounts for most services. The formula starts with three pieces of information: the work involved in providing the service (how much skill and time it takes), the practice expense (rent, staff, equipment), and the cost of malpractice insurance. Medicare assigns each service a relative value unit, or RVU, based on these factors.

Medicare then multiplies the RVU by a dollar amount called the conversion factor, which changes every year. The conversion factor is adjusted based on how much Congress has decided Medicare's total spending should grow. The result is the allowed amount for that service in that year. Because the conversion factor is the same nationwide, but the RVU can vary slightly by region, the allowed amount for the same service can differ between states or even between counties.

For example, a routine office visit might have an RVU of 1.0. If the conversion factor for the year is $33, the allowed amount is $33. If Congress cuts the conversion factor to $32 the next year, the allowed amount drops to $32, even though the doctor's actual costs have not changed. This is why allowed amounts can go down from year to year, even when inflation is rising.

Where to Find the Allowed Amount for a Specific Service

Medicare publishes the allowed amount for every service in the Medicare Physician Fee Schedule, which is updated every January. You can search this schedule on the Centers for Medicare & Medicaid Services (CMS) website at cms.gov. You will need the procedure code (called a CPT code) for the service you are asking about — your doctor's office can provide this.

You can also call Medicare directly at 1-800-MEDICARE and ask for the allowed amount for a specific service in your state. Have the CPT code and your state ready. Medicare will tell you the allowed amount but not what your doctor actually charges, so you may still need to call your doctor's office to compare the two numbers.

Some online tools let you search allowed amounts by entering your zip code and the name of the service, though these tools are not always current. The official Medicare Fee Schedule is the most reliable source.

The Difference Between In-Network and Out-of-Network Providers

An in-network doctor or hospital has signed a contract with Medicare agreeing to accept the allowed amount as full payment for covered services. You pay your copay or coinsurance (your share of the allowed amount), and the provider accepts the rest from Medicare. You owe nothing more, even if the provider's usual charge is higher than the allowed amount.

An out-of-network provider has not signed this contract. They can charge more than the allowed amount, and you are responsible for the overage. For example, if the allowed amount is $100 and the provider charges $150, Medicare pays its share (usually 80 percent of the allowed amount, or $80), you pay your coinsurance (20 percent of the allowed amount, or $20), and you owe the provider the $50 difference. This is called balance billing, and it can add up quickly.

Most Medicare beneficiaries use in-network providers to avoid balance billing. You can check whether a doctor or hospital is in-network by searching the Medicare Provider Directory on Medicare.gov or by calling the provider directly and asking.

How Allowed Amounts Change Year to Year

The allowed amount for each service changes on January 1 every year. The change is usually small — a few percent up or down — but it affects what you and Medicare pay. The change happens because Congress adjusts the conversion factor based on inflation, changes in medical practice, and budget decisions.

In some years, Congress has frozen the conversion factor or cut it, meaning allowed amounts stayed the same or went down even though doctors' costs rose. In other years, the conversion factor has increased. These changes are announced in the fall, and the new allowed amounts take effect January 1.

Your copay or coinsurance amount may also change if your plan changes its cost-sharing structure, even if the allowed amount stays the same. Check your plan's documents each fall during the annual enrollment period to see what your costs will be in the new year.

What Happens If Your Doctor Charges More Than the Allowed Amount

If your doctor is in-network, they cannot charge you more than your copay or coinsurance. If they do, you can file a complaint with Medicare or your state's insurance commissioner.

If your doctor is out-of-network, they can charge more, and you are responsible for the overage. Before you have a service done by an out-of-network provider, ask your doctor what they charge and what the Medicare allowed amount is. Then you can calculate what you will owe: your coinsurance on the allowed amount, plus the full overage. Some out-of-network providers will negotiate or waive the overage if you ask, but they are not required to.

If you receive a bill for more than you expected, check the Explanation of Benefits (EOB) that Medicare sends you. The EOB shows the allowed amount, what Medicare paid, and what you owe. If the bill does not match the EOB, contact your doctor's billing office and ask them to explain the difference.

Frequently Asked Questions

Why is the allowed amount different in my state than in another state?

The allowed amount varies by region because the RVU can be adjusted for local practice costs. For example, office rent and staff salaries are higher in some cities than others, so the allowed amount for the same service is higher there. The conversion factor is the same nationwide, but the RVU adjustment creates regional differences.

Can my doctor charge me the difference between their bill and the allowed amount?

Only if your doctor is out-of-network. In-network doctors agree to accept the allowed amount as full payment and cannot bill you for the overage. If an in-network doctor sends you a bill for more than your copay or coinsurance, contact Medicare or your state insurance commissioner.

Does the allowed amount include my copay or coinsurance?

Yes. The allowed amount is the total price Medicare recognizes. Your copay or coinsurance is your share of that allowed amount. Medicare pays the rest (after any deductible). The allowed amount does not change based on what you owe — it is the same for everyone.

How do I know what the allowed amount is before I have a service?

Call your doctor's office and ask them to look up the CPT code for the service you need. Then search the Medicare Physician Fee Schedule on cms.gov using that code and your state. You can also call Medicare at 1-800-MEDICARE and ask for the allowed amount.

What if the allowed amount goes down next year?

Your copay or coinsurance may go down too, since it is usually a percentage of the allowed amount. However, your plan can change its cost-sharing structure independently of the allowed amount, so check your plan documents in the fall to see what your costs will be in the new year.