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What Is Claims Adjudication?

By Daphne Mallory
Updated May 16, 2024
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Claims adjudication is a term used in the insurance industry to refer to the process of paying claims submitted or denying them after comparing claims to the benefit or coverage requirements. The adjudication process consists of receiving a claim from an insured person and then using software to process the claims and make a decision or doing so manually. If it’s done automatically using software or a web-based subscription, the claim process is called auto-adjudication. Automating claims often improves efficiency and reduces expenses required for manual adjudication. Many claims are submitted on paper and are processed manually by insurance workers.

Many insurance companies take advantage of auto-adjudication as a method of managing the large number of claims that has to be processed on a regular basis. Claims are submitted electronically in most cases, although paper filing is still an option, and the information is entered into software that reviews the claims. The software checks for errors, eligibility requirements, and deductible payments, and some software programs will even check for fraud. If the claim meets the insurance requirements, then it will be paid. When the claim fails the auto-adjudication process, then it can be denied or sent to an insurance examiner to review the claim manually.

After the claims adjudication process is complete, the insurance company often sends a letter to the filer describing the outcome. The letter, which is sometimes referred to as remittance advice, includes a statement as to whether the claim was denied or approved. If the company denied the claim, it typically has to provide an explanation for the reason why under regional laws. The company also often sends an explanation of benefits that includes detailed information about how each service included in the claim was settled. Insurance companies will then send out payments to the providers if the claims are approved or to the provider’s billing service.

The insurance company might only make a partial payment to the provider as a result of claims adjudication. Insurance companies are often required by law to provide an explanation as to the reason why only partial payment was made. Another possible outcome is a request made by the insurance company for the person to resubmit the claim. The reason is often to obtain additional information or to provide information that was missing in the original claim. If the claim is denied, then the entity or person filing the claim can usually file an appeal.

What Is Claim Adjudication in Medical Billing?

For patients with medical insurance, the invoice from the medical provider is sent to the insurance company before the patient receives a bill. The services rendered are coded and sent to the insurance company as a medical claim. Once the claim has been received, the insurance company reviews its portion of financial responsibility. This process is called claims adjudication. An insurance company may adjust what they will pay the provider, either assuming full responsibility for the entire amount, reducing the amount to pay or denying the claim altogether.

Review Process

A very thorough review of the medical claim begins once the insurance company receives the claim. The smallest details or errors can cause a claim to be rejected, even if the services listed were rendered to the patient. Any rejection the insurance company makes could create a greater financial responsibility on the part of the patient. Many medical providers are turning to billing software to help reduce the potential for errors and help claims make it through the review process. Coding errors and inaccurate or missing information about the patient are some of the leading reasons why medical claims are rejected.

If claim rejection has occurred, it means the claim itself has not been put into the adjudication system. There has been no formal receipt of the claim, and the medical provider must refile the claim. The provider may receive one of the following rejection messages:

  • Medicare member ID must be alpha/numeric
  • Entity/subscriber not found
  • Segment REF is missing/Payer claim control number required
  • Invalid diagnosis code

What Are the Types of Claim Adjudication?

Once the claim has been submitted, the insurance company can take one of several actions. These include denial, partial payment, resubmission, or payment in full.


There is a wide range of denial reasons during the claim adjudication process. Many times it will involve the patient’s eligibility for services or duplicate submission of a previously posted claim. A diagnosis code on the claim may be incorrect or missing, leading to the insurance denying payment.

Partial Payment

With this response, the insurance company limits what line items will be paid or the amount for billable services. Commonly, the insurance will pay a specific item on the claim and deny reimbursement for the rest. The provider could send the remaining portion to the patient, who may dispute the claim and payment process.


A resubmission occurs when the information is inaccurate or there are problems with the claim that are grounds for rejection. A resubmission gives the medical provider the opportunity to make changes or corrections and resubmit the claim to the insurance company.

Payment in Full

Should the information and billing amount on the claim be satisfactory to the insurance provider, the claim may be paid in full without any additional steps. In some cases, the payer will overpay the amount of the claim. While a provider is happy to take the extra money, the insurance company may realize the mistake and require the amount to be paid back. This situation is called a takeback.

What Are the Steps Involved in Claim Adjudication?

The insurance payer typically follows a five-step process when making medical claim adjudication decisions. These different steps can help the medical billing or collection teams understand how to generate, submit or conduct follow-up on their claims to get the most reimbursement from the payer.

1. Initial Processing Review

During this initial phase, the claims are checked for omissions or simple errors. These could include spelling problems with the name or the wrong patient name. The date of service or place of service could be wrong. Diagnosis codes could also cause a problem. Rejection at this phase allows the provider to make the change and resubmit.

2. Automatic Review

Under this review, more detailed items are checked against payer payment policies. Eligibility problems, duplicate claims, and precertification issues appear during this review.

3. Manual Review

Medical claim examiners, as well as physicians or nurses, manually compare claims to the medical documentation. This typically happens with an unlisted procedure.

4. Payment Determination

In this phase, the insurer decides if the claim will be paid, denied or reduced. Denied means the claim is not reimbursable, while reduced means the service level billed is too high for the diagnosis.

5. Payment

During this final phase, the insurance payer submits funds to the medical office. It provides a detailed notice and explanation for the payment determination. It clearly shows the adjustments, reductions, or denials for the specific charges on a medical claim.

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Discussion Comments
By JaneAir — On Jun 11, 2011

@sunnySkys- Even though computers don't have "compassion" on a whole they are much more accurate than people. I've been working in medical billing for quite awhile and I've seen this first hand.

I work in a small office so we were fairly slow to adopt computerized medical billing. Now that we have it I don't know how we ever lived without it. Our billing system is so much more accurate now it's unbelievable!

I would definitely rather have my own insurance claims processed by a computer rather than a human. I hope my insurance company uses computerized claims adjudication!

By indemnifyme — On Jun 10, 2011

@sunnySkys- I can understand why you feel that way. Unfortunately insurance claims are decided the same way whether a person or a computer does it. Insurance claims aren't decided based on compassion but on the insurance policy.

Simply stated an insurance policy will usually list either what is covered or what is excluded. If the claim doesn't fall into the criteria listed the insurance company isn't going to pay it.

The only difference between having a computer and a human process the claim is that the human probably will feel bad about having to deny a claim. However, the claim will still be denied if it isn't covered either way.

By sunnySkys — On Jun 08, 2011

The idea of insurance claims, especially medical claims, being processed automatically by software makes me nervous. I think an actual person should carefully review insurance claims and use compassion in making the decision. I definitely don't want a computer to decide whether my doctors visit is covered or not!

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