Medical Practice Billing Reconciliations: Charges, Collections, and Adjustments

Key takeaway: Medical billing reconciliation should explain how charges become collectible balances, how payments and adjustments settle those balances, and how the resulting cash and accounting entries are recorded. Charges, revenue, collections, and bank deposits are distinct measures.

This article is part of our guide to industry accounting specialties.

A practice can have accurate clinical records, billing reports, and bank statements that show different totals. Contractual rates and timing explain some differences; missing charges, duplicate postings, and unsupported adjustments explain others. A useful reconciliation identifies which is which and assigns unresolved items for follow-up.

Define the amounts before comparing them

Gross charges are the practice’s billed amounts before applicable reductions. They are useful for tracking billing activity but do not necessarily measure revenue the practice is entitled to earn.

The contractual allowable is the amount the provider agrees to accept under the applicable payer arrangement, including any permitted patient share. It is not the amount the insurer “agrees to accept.” The contract, coverage rules, and adjudication determine how much the payer and patient owe. For Medicare, accepting assignment means accepting the Medicare-approved amount as payment in full for the covered service, subject to the applicable patient cost sharing. See Medicare’s explanation of assignment.

A contractual adjustment reduces billed charges to the applicable allowed amount. Billing systems sometimes call this a contractual write-off. That label does not make it the same as a credit loss on a valid receivable. Keep adjustment codes that distinguish contractual reductions, corrections, financial assistance or price concessions, and amounts that became uncollectible.

Collections are amounts received from payers and patients; define whether a report shows them before or after refunds. A bank deposit may be a net settlement after fees or offsets and may arrive on a different date. Revenue depends on the accounting basis and recognition rules, not simply the amount charged or deposited.

A single-service example

Assume a practice bills $200, the agreed allowable is $120, the payer owes $90, and the patient owes $30. The contractual reduction is $80. If the payer pays $90 and the patient pays $20, total collections are $110 and $10 remains outstanding, assuming no other adjustment.

The practice has not suffered an $80 bad debt: under these facts it was not entitled to that $80. Nor does the $110 collected establish $110 of accrual revenue when the recognized amount is $120. These are different measurements of the same transaction.

State the accounting basis and avoid duplicate income

On accrual books, revenue and receivables reflect the applicable recognition and measurement rules. This can involve contractual allowances and estimates of price concessions before the payer settles the claim. Later credit deterioration can require different treatment from an original reduction in the expected transaction price. A denial or disputed balance requires evaluation; it is not automatically a deductible bad debt or an automatic charge to the patient.

On cash-basis books, a practice may keep operational receivables in its billing system without recording the same receivables in its general ledger. Those billing balances still support collection work and management analysis. The correct month-end comparison is a bridge between the systems, with the basis and adjustments identified.

For the $120 accrual example above, the initial simplified entry is Dr Accounts Receivable $120 and Cr Patient Service Revenue $120. Collection of $110 then debits Cash and credits Accounts Receivable $110, leaving $10 receivable. Crediting revenue again on collection would count the same service twice. Gross $200 charge detail and the $80 contractual adjustment can remain visible in the supporting billing records.

Financial reporting and income-tax treatment require separate consideration. A cash-method taxpayer generally cannot deduct an uncollected service receivable that was never included in taxable income. An operational adjustment does not create a second deduction for income never recognized. See the bad-debt discussion in IRS Publication 334. If financial statements and tax records use different permitted bases, maintain the necessary reconciliation.

Reconcile charges without inventing billable services

The practice’s authorized clinical and billing staff should compare encounters to the expected billing outcome. That includes separately billable services, bundled services, global-package components, canceled visits, and nonbillable activity. The control is whether the correct billing treatment occurred, not whether every clinical service generated its own charge.

Investigate missing or duplicate charges, late entries, incorrect dates, and interface failures. Document the reason for each exception and the person responsible for resolving it. An accountant can reconcile summaries and identify discrepancies; determining clinical documentation sufficiency, coding, and payer billing requirements belongs with the personnel engaged and qualified for those tasks.

Use consistent report cutoffs. A service-date report and a posting-date report can differ because of late charge entry. Preserve both dates where available and record how late entries are included in the monthly close.

Connect remittance advice to payments and adjustments

An Electronic Remittance Advice (ERA) explains claim adjudication and payments. It is not itself proof that the corresponding cash reached the bank. CMS explains that adjustments can occur at the service-line, claim, or provider level. Claim adjustment and remark codes help explain the result; provider-level balance adjustments can include prior-overpayment recoveries or interest that does not map to an individual claim. See CMS payment and remittance guidance.

For each remittance, retain the payer, payee, remittance date, payment amount, trace identifier, and the claim or provider-level detail needed to reconstruct the settlement. Apply patient responsibility only where supported by the adjudication, contract, and applicable billing protections. Do not transfer a denied payer balance to a patient simply to close the claim.

For standardized ACH health care payments, the matching TRN information links the EFT to its ERA. CMS calls this reassociation. Obtain the necessary bank addenda or payer detail when the bank’s shortened description is insufficient. Check identifiers and amounts rather than relying on the deposit date alone.

An EFT settlement example

Suppose the current remittance lists $10,000 of claim payments, subtracts an $800 recovery of an earlier overpayment, and adds $20 of interest. The EFT is $9,220: $10,000 − $800 + $20. Posting only $9,220 to the current claims would leave them understated by $780.

If the $800 recovery was already recorded as a payable and the $10,000 claims are already receivables, a simplified accrual entry is Dr Cash $9,220; Dr Payer Overpayment Payable $800; Cr Accounts Receivable $10,000; Cr Interest Income $20. Debits and credits each total $10,020. If those balances were not previously recorded, or the recovery is disputed, determine the underlying treatment first rather than copying this entry.

Track denials, recoupments, refunds, and reversals with their own support and follow-up dates. A provider-level adjustment may settle an earlier-period issue; it should not be assigned arbitrarily to a current patient account.

Bridge billing receivables, collections, and the bank

A basic billing receivable rollforward is opening receivables plus new supported billings, less contractual and other approved reductions, less applied collections, plus or minus supported corrections, equals closing receivables. State whether the balances are gross or net and use the same basis throughout.

For example, begin with $50,000 in receivables and add $100,000 in gross charges. Subtract $35,000 in contractual reductions, $60,000 in applied collections, and $2,000 in other approved balance reductions. Closing billing receivables are $53,000. This illustration assumes no other entries; the $2,000 requires its own classification and does not automatically become a tax deduction.

Separately reconcile collections to cash movement. If $60,000 was received for receivables, $1,000 in refunds was paid, $900 in processing fees was withheld, and $2,000 remained in settlement at month-end, current bank cash movement from these items is $56,100. That assumes no opening settlement balance and no other items. The $2,000 remains a supported asset or clearing balance; the $900 fee is not an additional contractual adjustment.

Unidentified receipts should remain in an appropriate controlled clearing or unapplied-cash account while investigated. Record their source, age, amount, and next action. Their accounting and tax treatment depends on the facts; a suspense label does not defer taxable income indefinitely. Do not force a zero suspense balance with unsupported revenue, write-offs, or patient allocations.

Measure collection performance consistently

A collection rate is useful only when its numerator and denominator describe comparable activity. Define the service or billing cohort, measurement date, contractual adjustments, refund treatment, and which payer and patient collections are included. Identify whether the measure is gross collection rate, net collection rate, or a different internal metric.

For an illustrative service cohort, gross charges are $100,000 and valid contractual reductions are $35,000, leaving a $65,000 adjusted collectible base. Through the measurement date, $58,000 was collected and $1,000 refunded for that same cohort. Net collections of $57,000 divided by $65,000 produce 87.69%.

If there are no other balance changes, $8,000 remains outstanding. Do not remove bad-debt balances from the denominator merely to make performance look better. Define any separate charity-care or other exclusions transparently and apply the policy consistently.

Dividing all cash collected this month by this month’s charges or expected revenue can be misleading because the cash may settle earlier services. A rate can exceed 100% during an older-receivable collection effort without proving a posting error. Pair the metric with aging, denial trends, adjustment reasons, and cohort maturity.

Use a short monthly close checklist

Review payments as they arrive, investigate charge exceptions regularly, and complete the broader close monthly if that cadence fits the practice. These are suggested operating controls, not a universal legal schedule. Material discrepancies and time-sensitive payer appeal or refund obligations may need attention sooner.

Limit patient-data access to the accounting purpose

Begin with payer summaries, account totals, reconciliations, and properly de-identified reports where sufficient. Removing names alone does not necessarily de-identify health information. Avoid sending encounter records, detailed ERAs, or patient balances through an ordinary contact form before establishing the appropriate arrangements.

HHS identifies a CPA firm whose accounting services involve protected health information (PHI) as an example of a business associate. Where required, establish a business associate agreement and the appropriate safeguards before PHI is disclosed. See HHS business-associate guidance.

For accounting access subject to the minimum-necessary standard, define the information needed, authorized users, purpose, and access conditions. A reconciliation engagement does not justify unrestricted access to clinical records. Use the practice’s approved secure transfer and storage process, with role-appropriate access and retention arrangements. See the HHS minimum-necessary requirements.

Define the accounting engagement

Specify who performs billing, coding, claim submission, payer follow-up, bookkeeping, and month-end reconciliation. Ordinary reconciliation work identifies differences through the agreed procedures; it is not a guarantee that every service was properly coded, billed, or collected.

Likewise, financial-statement preparation and a formal review or audit are different engagements. The word “review” in a routine accounting conversation should not imply that an assurance engagement has been performed. The engagement letter and any resulting accountant’s report should identify the actual service.

CPA Firm South Florida’s published preparation pricing includes cleanup required for the quoted return. Recurring monthly bookkeeping, ongoing billing reconciliation, or reconstruction outside that agreed return scope should be defined separately. Complexity alone should not be used to contradict an agreed included-cleanup scope.

To discuss the practice’s accounting needs, contact CPA Firm South Florida with a general description of the systems, reporting basis, and reconciliation backlog. Establish the engagement and document-sharing process before transmitting patient information.

Accounting engagements for medical practices in Fort Lauderdale should state which of these functions the firm performs and which remain with the practice billing staff.

Frequently asked questions

Should a practice’s gross charges equal its bank deposits?

No. Contractual reductions, unpaid patient and payer balances, prior-period collections, refunds, recoupments, fees, and settlement timing can explain differences. Reconciliation documents these differences instead of forcing unrelated totals to equal one another.

Is a contractual write-off the same as a bad debt?

No. A contractual adjustment reduces a billed amount to the amount permitted by the applicable arrangement. A bad debt concerns an amount that was owed but becomes uncollectible. Some billing systems use the label contractual write-off; the accounting should distinguish the economic reasons regardless of terminology.

Can a cash-basis practice maintain billing receivables?

Yes. The billing system can track outstanding claims and patient balances for operations even when those receivables are not recorded in a cash-basis general ledger. Reconcile the systems through a documented bridge appropriate to the accounting basis.

What if a payer deposit does not match the claim-payment total?

Match the remittance and EFT identifiers, then check provider-level adjustments, offsets, refunds, recoupments, timing, and posting errors. Keep unresolved differences documented with an assigned owner. Do not allocate an unidentified amount to a convenient patient account just to clear a reconciliation.

What patient information should be sent to an accountant?

Begin with summary or properly de-identified reports where those meet the accounting purpose. If protected health information is required, establish appropriate business-associate arrangements, minimum-necessary access, and the approved secure transfer process before sharing it.

Is return-related bookkeeping cleanup included in the firm’s fee?

CPA Firm South Florida’s published pricing includes cleanup required for the quoted return. Ongoing monthly bookkeeping, recurring billing reconciliation, and reconstruction outside the agreed return scope should be separately defined. Confirm the actual deliverables in the engagement.