Filing a medical claim doesn’t guarantee that an insurance provider will pay it. The insurance company will have to evaluate the patient’s eligibility, the services that have been provided, and then apply its reimbursement policies and calculate what is due from the patient.
This assessment process is called medical claim adjudication.
For healthcare professionals, medical claim adjudication can tell the fate of the claim, either in terms of getting the right amount, lower amount or rejection of the claim.
Learning more about what goes into the insurance companies’ decisions is critical for healthcare practices to be able to spot payment issues, clear up claim discrepancies and avoid unnecessary delays in receiving payments.
This document describes the process of medical claim adjudication, potential results, common problems and actions for billers.
What Is Adjudication in Medical Billing?
Medical billing adjudication is the process in which an insurance company reviews an insurance claim once it’s been submitted to determine what it will be reimbursed. The payer verifies coverage and medical necessity, coding accuracy, contractual reimbursement requirements and benefit limitations prior to approving, adjusting or denying the claim.
This is the claim adjudication, or how much the insurance company will cover and what adjustments will be made, and if any amount is due from the patient.
For a physician visit, for instance, a provider submits a $250 fee. The health plan evaluates the claim and pays according to its contractually set reimbursement of $180.
Should the payer decide that the patient owes a copay of $30, the calculation would be:
- Provider’s submitted charge: $250
- Contractual adjustment: $70
- Allowed amount: $180
- Patient copayment: $30
- Insurance payment: $150
The physician cannot treat the full $250 as collectible revenue under this example’s participating-provider contract. This modification will lower the cost, with the cost sharing being divided between the insurance company and the client based on the available benefits.
The precise figure will vary depending on the coverage and payment arrangements.
Why Is Claim Adjudication Important for Healthcare Providers?
Adjudication impacts the bottom line directly in terms of revenue earned and how soon payments will be received.
While claims can be submitted in an accurate and timely manner, payments could be delayed when the insurance company finds a difference in coverage or requests additional information or an edit is made to the payment.
The effects of adjudication do not end here.
It Determines the Actual Reimbursement
Providers’ fee rates are not always a true reflection of the total cost.
With regards to adjudication, fee schedules, negotiated rates, patient benefits and payment policies are all applied by the insurer. These calculations calculate the limit of the amount which may be allowed and the financial responsibility of the payer.
Billing teams should review the final payment and compare it to the contract or fee schedule, and don’t assume that any variance between billed and paid payment represents lost revenue.
It Identifies Coding and Coverage Problems
The claim could be denied on the grounds that the diagnosis code submitted does not justify the service according to the coverage policy.
Another set of claims face issues due to modifier, frequency, patient information, or coordination of benefits.
An analysis of such instances enables billing staff to detect errors in other claims as well.
It Influences Accounts Receivable
An unresolved claim ties up possible income.
An unclaimed claim will be ignored if the billing department does not monitor the process to make sure it is resolved, until the filing or appeal deadlines are near.
Adjudication monitoring will allow practices to concentrate on non-paid bills.
How Does the Claim Adjudication Process Work?
The claim process can be said to progress through several steps ranging from claim filing to payment decision for the claim.
The specific order may differ between insurers and types of claims.
Step 1: The Physician Files the Claim
Following a patient visit, the billing staff creates the claim based on the information in the medical chart and practice management system.
An exemplary claim contains:
- Patient and insurance information
- Rendering and billing provider identifiers
- Date and place of service
- CPT or HCPCS procedure codes
- ICD-10-CM diagnosis codes
- Applicable modifiers
- Service units and billed charges
Most healthcare claims, such as those submitted to a professional or institutional healthcare entity, are transmitted electronically in the format adopted by the HIPAA.
The billing department should make sure that the claim is based on documented services and meets all the requirements of the payers prior to submission.
Step 2: The Claim Passes Initial Validation
It is evaluated whether the claim complies with the basic rules of electronic claim submission.
This step could reveal lack of information, incorrect codes, or formatting errors.
A clearinghouse could also refuse the claim prior to passing it to the payer.
Refusal does not mean that the claim went through the official evaluation process of the payer. The billing staff should fix the detected error and re-submit the claim.
Validation does not ensure that the claim will be paid.
Step 3: The Insurer Verifies Coverage and Benefits
The adjudicated claims system will verify the coverage information and any applicable benefits according to the date of service.
Based on the claim, the insurance company will verify:
- Active coverage on the treatment date
- Covered and excluded services
- Deductible status
- Copayment and coinsurance obligations
- Network participation
- Referral or prior authorization requirements
- Primary and secondary insurance information
For instance, the practice may confirm coverage prior to a visit, but then the claim may have difficulty getting paid as a result of changes in coverage or because the service is out-of-plan coverage.
Eligibility verification is one way to help mitigate these risks, but cannot guarantee reimbursement.
Step 4: The Payer reviews Coding and Medical Necessity.
The fourth step is for the payer to assess the services offered, according to the coding, coverage and payment requirements.
Medical necessity criteria, number of units, service frequency, modifiers and diagnosis-procedure links are all included in these evaluations.
The Medicare National Correct Coding Initiative (NCCI) edits are used for the identification of improper code pairings and number of units.
A claim may pass technical validation yet fail a payment-policy edit.
For example, a provider can bill two procedures performed during the same visit. In case a particular bundling edit exists, the insurer may deny the claim line unless the guidelines allow the use of a modifier.
It is never recommended to apply a modifier just to avoid denial. This decision should be supported by medical documentation.
Step 5: Calculating the Allowed Amount of Payment by the Insurer
When the insurance company identifies which of the billed procedures can be reimbursed, the calculation of payment is made according to the payment methodology used.
Such calculation includes taking into account contractual payment rates, Medicare payment methodology, limitation of benefits, coordination of benefits, patient’s cost sharing and other aspects.
The insurer identifies the amount to be paid by the provider and to be paid by the patient as well.
This result might be different from the billed amount without showing the mistake in the billing process.
Step 6: The Payer Issues Its Decision and Remittance Advice
Following adjudication, the payer informs about its decision on adjudication.
A remittance advice (ERA), which is usually sent using the ASC X12 835 transaction, describes the result of the processing of claims by the payer.
It can contain the amount allowed, payment, adjustments, patient liability, and appropriate adjustment or remark codes.
This information is fed into the billing team’s system for posting of payments, recon, denial identification, and decision making.
What Are the Different Outcomes of Claims Adjudication?
Not every adjudicated claim results in full payment.
The following outcomes commonly appear during medical claims processing.
| Outcome | What It Means | Billing Team’s Next Action |
| Paid | The payer approves payment according to the applicable rules. | Post and reconcile payment. |
| Partially paid | The payer pays some services or reduces the payable amount. | Review unpaid lines and adjustments. |
| Denied | The payer adjudicates the claim or service and refuses payment. | Investigate the denial and determine the correction or appeal route. |
| Pending | The payer has not completed processing. | Monitor status and respond to information requests. |
| Rejected | The claim fails an applicable submission or processing requirement. | Correct the error and resubmit appropriately. |
The occurrence of a contract adjustment does not necessarily necessitate a denial follow-up.
Similarly, if the claim is an outstanding claim, it does not mean that the claim was refused. There may be more work to be done.
The differences can help prevent duplicate submission in the billing department.
Claim Rejection vs Denial – What is the Difference?
However, while both issues can be barriers to payments, they demand different actions.
Rejection of a claim: Claim does not meet some criterion for submission or validation and cannot go through the regular process of adjudication.
For instance, a claim is rejected from a clearinghouse due to its invalid subscriber identifier.
Denial of a claim: Payer analyzes the claim and comes to the decision that he will not reimburse some service or claim. For instance, a claim is denied by the insurer because of the non-conformity of submitted information to the relevant coverage policy.
Billing departments normally react to rejections by fixing the claim and resubmission of the latter.
The issues of denial should be considered in greater detail. The appropriate response to denial depends on the policy of the payor and the reason behind it; it could be correction, documentation, reconsideration, and even an appeal.
Filing an original duplicate claim without knowing the underlying cause of the denial is ineffective.
Common Problems That Affect Medical Claim Adjudication
Other claims-related issues arise even before the submission of the claim to the insurer while others come into the picture only after the insurer evaluates the claim.
These include the following:
Incorrect Diagnosis/Procedure Codes
However, when there is no proper coding for the diagnosis and procedure, the claim may get rejected during the coding and coverage verification phase.
This occurs when a procedure is done by the physician but the diagnoses entered in the claim cannot justify the need for that procedure under the policy of the insurer.
Missing or Unsupported Modifiers
Modifiers communicate specific circumstances associated with a reported service.
An omitted modifier may affect payment when the coding rules require one. An unsupported modifier can also produce a denial or compliance concern.
The billing team must evaluate the documentation and applicable coding instructions before changing a modifier.
Authorization Problems
Some services require prior authorization under the patient’s plan.
It may happen that the payer denies the claim because of the lack of proper authorization, wrong authorization number, or provision of services not covered by the authorization.
But authorization does not mean that there will be reimbursement.
Incorrect Coordination of Benefits
The presence of multiple insurance policies for patients is yet another possibility that can lead to errors in adjudication.
If by any chance this procedure submits the claim to the wrong payer, the insurance company will reject the claim or simply delay its processing.
It is the responsibility of the billing team to identify the correct order of payers and the coordination of benefits before submission of the claim.
Documentation Errors
There are some claims that necessitate the submission of certain additional documents.
Failure to submit the required documentation within the stipulated time will cause delays or rejections.
It is vital that the medical records demonstrate the need for the encounter, procedure, diagnosis, and treatment.
Understanding CARC, RARC, and Adjustment Group Codes
One of the most valuable parts of claim adjudication is the explanation the insurer provides after processing.
The remittance advice may contain three important code categories.
| Code Type | Purpose | Practical Meaning |
| CARC (Claim Adjustment Reason Code) | Explains why the payer adjusted a claim or service line. | Identifies the general payment adjustment reason. |
| RARC (Remittance Advice Remark Code) | Adds information about an adjustment or remittance decision. | Helps clarify payment or processing details. |
| Claim Adjustment Group Code | Identifies the category of financial responsibility. | Helps distinguish contractual adjustments from patient responsibility and other adjustment types. |
For instance, the code CO usually means a contractual adjustment, while the code PR means patient responsibility. The billing team should analyze such codes along with the payment information provided by the payer. Not all of the time, the CARC is sufficient to understand what step to take next.
Moreover, these codes help offices differentiate between a case of underpayment, contract adjustment, and patient’s responsibility.
Real Example: How a Denied Claim Moves Through Adjudication
Let’s imagine the scenario where an insurance company receives an electronically submitted claim for a medical service.
It is accepted by the payer and started being processed. But then it is denied since, according to the medical policy, the submitted diagnosis does not provide any justification for the payment of such a procedure.
The denial does not necessarily mean that the procedure was unnecessary.
The following procedures should be followed by the billing department:
Remittance advice review: Analyze the codes of adjustments and remarks corresponding to the denial.
Check payer’s policies: Verify the coverage criteria applicable to the service procedure and the day of service.
Claim and medical record comparison: Assess the accuracy of the initial claim submission regarding documentation of the diagnosis and treatment.
Determine the course of action: Resubmit the claim in case the payer allows it and there is a mistake in the initial claim; initiate an appeal process in case the initial claim was accurate.
Monitor the process: Assess the response from the payer and update the outstanding balance on the account.
The above procedure considers the actual denial reasons rather than resubmitting the same claim.
Automated Claim vs. Manual Claim Processing
Insurance payers utilize automated claim processing systems to review routine claims.
Electronic edits, benefits information, and payment rules are considered by the systems to determine whether the claim can move forward without manual intervention.
Manual intervention may be required when a claim requires additional medical records, a specialized review, or clarification of an unusual billing circumstance.
| Automated Adjudication | Manual Adjudication Review |
| Uses programmed payment and validation rules. | Involves human evaluation of selected issues. |
| Handles many routine claims efficiently. | Addresses claims requiring closer examination. |
| Applies established coding and coverage edits. | May review supporting records or complex circumstances. |
| Can produce payments, adjustments, or denials. | Can also produce approvals, adjustments, or denials. |
Automation does not guarantee an accurate payment outcome.
A system may apply the correct programmed edit to a claim that contains incorrect information, or a practice may disagree with how a policy applies to a documented service.
For this reason, billing departments still need effective payment review and denial follow-up procedures.
How Does Pharmacy Claims Adjudication Differ?
The pharmacy claims adjudication process follows a different operational workflow from many professional medical claims.
Retail pharmacies commonly submit prescription claims electronically while processing a prescription. The pharmacy benefit processor evaluates information such as member eligibility, medication coverage, formulary restrictions, quantity limits, and applicable cost-sharing.
The system may return an approved transaction with payment details or reject the transaction with an explanation.
Medical claim adjudication, by comparison, typically occurs after the healthcare provider delivers services and submits the claim.
Both processes determine coverage and payment responsibility, but they use different transaction standards and operational workflows.
For medical practices that administer medications or bill drug-related services, understanding which medical or pharmacy benefit applies can help prevent submission and reimbursement problems.
How Can Healthcare Practices Improve Claim Adjudication Outcomes?
The strongest approach starts before the billing department submits a claim.
Verify Patient Benefits Before Treatment
Confirm active coverage, applicable service benefits, and relevant authorization requirements.
Pay particular attention to procedures that involve benefit exclusions, frequency limitations, or network restrictions.
Strengthen Clinical Documentation
Encourage providers to document the diagnosis, medical necessity, procedure details, and circumstances that support reported services.
Clear records reduce uncertainty when coders assign diagnoses or the payer requests supporting information.
Review Claims Before Submission
Use claim-editing tools and billing quality checks to identify missing data, inconsistent codes, incorrect identifiers, and potential modifier issues.
Automated checks can catch predictable errors, while trained coding staff can investigate circumstances that require professional judgment.
Monitor Claim Status Consistently
Separate rejected, pending, denied, and underpaid claims in the billing work queue.
Assign follow-up responsibilities and monitor payer response deadlines rather than allowing unresolved accounts to accumulate.
Analyze Recurring Denials
Review denials by payer, procedure, reason code, provider, or specialty.
If multiple claims encounter the same issue, examine the underlying workflow rather than treating every denial as an isolated incident.
A repeated authorization denial, for example, may indicate a scheduling or verification problem that requires a front-office correction.
Compare Reimbursement Against Expected Payment
An ERA may show that a claim received payment, but the payment may still differ from the amount the practice expected.
Compare adjudicated amounts with applicable contracts and fee schedules. Investigate discrepancies before classifying them as underpayments.
Accurate payment review also prevents billing teams from pursuing amounts that the provider must adjust under contractual or regulatory requirements.
Key Claim Adjudication Metrics Every Practice Should Track
A practice can learn more from its adjudication reports when it measures the causes and outcomes of claim problems rather than simply counting unpaid claims.
Consider monitoring:
- First-pass resolution rate: The percentage of claims that complete processing successfully without avoidable corrections or additional intervention, using a consistently defined calculation.
- Claim denial rate: The proportion of adjudicated claims or claim lines that receive denials.
- Rejection rate: The percentage of submissions rejected before completing normal adjudication.
- Underpayment rate: The share of payments that fall below verified contractual or fee-schedule expectations.
- Denial resolution time: The time between identifying a denial and reaching its final resolution.
- Accounts receivable aging: The amount of outstanding receivables grouped by how long they have remained unpaid.
These measurements help billing managers identify which problems require immediate attention.
For example, a practice with frequent clearinghouse rejections should investigate submission quality. A practice with low rejection rates but persistent coverage denials may need to examine medical necessity documentation or payer-policy checks.
The right corrective action depends on where the claim actually fails.
Frequently Asked Questions
1. What does adjudication mean in medical billing?
An adjudicated claim has completed a payer’s claim review and received a payment determination. The insurer may approve payment, apply adjustments, deny the claim, or assign an appropriate portion of the allowed amount to patient responsibility.
2. How long does medical claim adjudication take?
Processing time depends on the insurer, claim complexity, submission method, and applicable payment rules. Straightforward electronic claims may process relatively quickly, while claims requiring documentation or manual review can take longer. Practices should check payer-specific processing standards and applicable prompt-payment requirements.
3. Does adjudicated mean a medical claim has been paid?
No. Adjudicated means the payer has made a claim determination. The outcome may include full payment, partial payment, or denial. The billing department should review the remittance advice to confirm the actual financial result.
4. What is the difference between claim processing and claim adjudication?
Claim processing covers the broader administrative workflow, including claim receipt, validation, adjudication, and payment communication. Claim adjudication specifically determines coverage, payment eligibility, adjustments, and financial responsibility.
5. Can an insurance company reverse an adjudicated claim?
Yes. Depending on applicable rules and circumstances, a payer may reopen, adjust, or recover payment after an earlier decision. Reasons may include overpayment identification, corrected information, or post-payment review. Providers should examine the payer’s explanation and applicable dispute rights.
6. What happens when a claim fails adjudication?
A payer may deny a service, request additional information, or apply another processing outcome. Billing teams should identify the specific reason, review the documentation and payer policy, and determine whether to correct the claim, supply information, or appeal.
7. What is an adjudicated claims system?
An adjudicated claims system is the payer’s processing technology that applies eligibility information, coverage rules, coding edits, and payment calculations to healthcare claims. It helps determine the claim outcome and generate associated payment and adjustment information.
8. How can providers reduce claim adjudication errors?
Providers can reduce avoidable problems through accurate patient registration, benefit verification, complete documentation, appropriate coding, pre-submission claim reviews, and consistent denial analysis. These practices improve submission quality but cannot guarantee payment.
Conclusion
Adjudication in medical billing determines what happens to a healthcare claim after the insurer receives it. The payer evaluates coverage, coding, medical necessity, reimbursement rules, and patient benefits before issuing its decision.
For healthcare practices, the critical task does not end when the insurer completes the review. Billing teams must interpret the remittance advice, reconcile payments, resolve denials, and investigate discrepancies that affect collections.
A structured claim review process helps providers identify preventable billing problems, protect appropriate reimbursement, and maintain better control over their revenue cycle.
Accurate documentation, disciplined claim submission, and timely follow-up remain essential to managing adjudication outcomes effectively.
Are Claim Denials Delaying Your Practice’s Payments?
Incorrect claim information, coding discrepancies, and unresolved payer adjustments can disrupt your collections. Our medical billing specialists can help your practice review claim issues, manage denials, and improve payment follow-up.
Get professional billing support and take greater control of your revenue cycle.