Contractual Adjustment
A contractual adjustment is the difference between your billed charge and the payer's contracted allowed amount, written off as required by your network agreement. It appears on remittances as CO-45. It is not a loss or a discount error; it is the mechanical gap between chargemaster prices and contract rates.
- Remittance code
- CO-45
- Formula
- Billed charge − allowed amount
- Required by
- Your participation contract
- Bill the patient?
- Never, for in-network claims
How does a contractual adjustment work?
When you join a network, you agree to accept the payer's fee schedule as payment in full. Your billed charge stays whatever your chargemaster says, but on adjudication the payer prices the claim at the contracted allowed amount and reports the difference as a CO-45 adjustment. You post that difference off the account, the payer pays its share of the allowed amount, and the patient owes their cost-share of the allowed amount.
The CO group code matters: CO means contractual obligation, which is payer-provider business the patient can never be billed for. This is the core mechanic that separates in-network billing from out-of-network balance billing.
What does a contractual adjustment look like on an ERA?
Take a 99214 billed at $260 to a commercial payer whose contract allows $131.20:
| Line | Amount |
|---|---|
| Billed charge | $260.00 |
| Allowed amount | $131.20 |
| Contractual adjustment (CO-45) | $128.80 |
| Patient copay (PR-3) | $30.00 |
| Payer payment | $101.20 |
On the 835 ERA this shows as a CAS*CO*45*128.80 segment and a CAS*PR*3*30 segment. Everything reconciles: 128.80 + 30.00 + 101.20 = 260.00. If the pieces do not sum to the billed charge, something on the remit was misposted or the payer applied an additional adjustment you have not accounted for. For the reference card on the code itself, see CO-45.
When is a contractual adjustment actually a problem?
When the allowed amount underneath it is wrong. The adjustment is only as correct as the payer's pricing, and payers misprice: outdated fee schedules after an amendment, wrong provider tier, missed multiple-procedure logic running the wrong direction, or a claim priced off the wrong network's rates entirely. Because billers are trained to treat CO-45 as routine, a payer paying $118 on a code your contract sets at $131.20 loses you $13.20 per encounter invisibly. At 2,000 encounters a year, that single mispriced code costs $26,400.
- Load every contract's fee schedule into the PM system, not just Medicare's.
- Set posting rules to flag any allowed amount that deviates from the loaded rate by more than a dollar.
- Work flagged claims as underpayments: send the payer the contract rate, the claim number, and a demand for reprocessing.
- Quarterly, spot-audit your top 10 codes per payer against the current contract exhibit.
Frequently asked questions
CO-45 is the claim adjustment reason code payers use to report the contractual adjustment on the remittance ("charge exceeds fee schedule/maximum allowable"). So CO-45 is the label; the contractual adjustment is the amount. Seeing CO-45 on every paid claim is normal and expected, not a denial to work.
No. Balance-billing the contractual adjustment on an in-network claim breaches your participation agreement, and for Medicare it violates federal law for participating providers. The patient owes only the cost-share the remittance assigns: copay, coinsurance, and deductible, calculated from the allowed amount, never from billed charges.
Because chargemaster prices are typically set at 150% to 400% of Medicare to avoid underbilling any contract. If your fee is $300 and the contract allows $110, the $190 adjustment is arithmetic, not lost revenue. The number to scrutinize is the allowed amount versus your contract, not the adjustment size.
Yes, from the 835 ERA, but with a guardrail: auto-post only when the allowed amount matches your loaded fee schedule within a tolerance (say $1). Silent auto-posting with no contract comparison is how systematic underpayments run for years without detection.
Sources & further reading
Reviewed by the ImmediCare Solutions RCM team
Certified billers and coders handling claims across 50+ specialties nationwide. This entry is reviewed against current payer policy and CMS rules. Last review: Jul 5, 2026.
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