Did you know that, according to Data Springs, formerly known as the Council for Affordable Quality Healthcare (CAQH), 10 billion claims were submitted annually? Each of these claims plays a crucial role in the revenue cycle of healthcare providers and facilities. Unfortunately, many of these claims lead to revenue disruptions due to underpayments.
Healthcare underpayments occur when a provider is reimbursed less than the contractually agreed reimbursement amount by the payer under an active contract.
However, underpayments are different from denials because the payer issues partial reimbursement instead of denying payment entirely. Therefore, underpaid claims slip through as “paid” claims, leading to an overlooked source of revenue leakage.
Additionally, recovery of healthcare underpayments is often time- and resource-intensive for providers. In medical billing, payer contracts include the reimbursement obligations for payers. These reimbursement methodologies may include:
- Fee schedule
- Percentage of billed charges
- Case-rate method
However, when a payer misapplies the contractual reimbursement rates, the revenue cycle recovery becomes more challenging.
What is an Underpaid Claim?
An underpaid claim refers to a processed and paid claim with reimbursement below the provider’s contractual or statutory reimbursement amount.
A claim denial and a healthcare underpayment are different. In a denial, the service provider does not receive any reimbursement.
However, in healthcare underpayments, the service provider receives only part of the reimbursement due under the payer contract.
In most cases, underpayments reflect on the ledger as a payment, which is why billing staff frequently mark the payment as resolved. While the billing staff moves on, the discrepancy will go unaddressed.
Examples of Healthcare Underpayments
An underpayment may occur if:
- The contracted annual rate increase was not applied after a fee schedule update.
- The procedure was reimbursed at a lower fee schedule tier than required by the negotiated contract.
- An incorrect diagnosis-related Group (DRG) or case rate was applied to the submitted patient diagnosis.
- Separate medical procedures were wrongly bundled/combined into a single, smaller payment.
- Incorrect Coordination of Benefits (COB) processing transfers payment responsibility and reduces reimbursement to the provider.
Handling an Underpaid Claim
- Perform a line-by-line comparison of the paid amount and the contracted rate for a particular service or DRG code.
- Review the Explanation of Benefits (EOB) or Electronic Remittance Advice (ERA) and retain it as supporting documentation for the payment discrepancy.
- Submit an appeal or payment reconsideration citing the applicable contract provision.
- Track the appeal through resolution and verify that the corrected reimbursement is posted to the applicable patient account.
What is Underbilling?
Underbilling is another reason for healthcare underpayments and billing errors from the provider’s side. During an underbilling, the staff bills a lower amount than what the services and documentation actually support.
Unlike healthcare underpayments, underbilling does not occur due to payer processing errors. Instead, it is a coding or billing mistake due to:
- Incorrect units reporting
- Missing modifier
- Wrong revenue code
Important Billing Note: Underbilling occurs when the provider’s billing team makes these errors.
Causes of Underbilling
Service providers may encounter underbilling if:
- Modifiers like 25 or 59 are missing for additional reimbursement (when applicable).
- Errors in charge capture prevent a rendered service from being included on the claim.
- A lower-level evaluation and management (E/M) code is selected by the billing team rather than the one supported by documentation.
- The team fails to bill applicable ancillary services.
Industry Benchmarks
According to the American Hospital Association, Medicare reimbursed hospitals at 83 cents on the dollar, resulting in $100 billion in underpayments in 2024.
Generally speaking, underpayments commonly account for 1% to 3% or more of net patient revenue for service providers contracting with commercial payers.
Underbilling can be identified through charge capture audits by comparing clinical documentation with submitted claims to identify missed or underreported services.
Underbilling vs Underpaid Claims
Underbilling and underpaid claims are an inseparable part of healthcare underpayments.
| Underbilling | Underpaid Claims | |
|---|---|---|
| Definition | A claim is submitted for less than the documented services provided. | A correctly billed claim is reimbursed at a rate lower than the expected or contracted amount. |
| Origin | Provider-side issues, such as documentation, coding, or charge capture. | Payer-side issues, such as contract interpretation or claims processing. |
| Common Causes | Undercoding, incomplete documentation, missing modifiers, or omitted charges. | Contract misapplication, incorrect fee schedules, inaccurate DRG weighting, or claims processing errors. |
| Detection | Detected via charge capture reviews, documentation audits, and coding audits. | Submit an appeal or payment reconsideration supported by the applicable contract terms and request claim reprocessing. |
| Who Fixes It? | Provider’s coding and billing team. | Payer, after the provider submits an appeal or payment dispute. |
| Resolution | Correct the coding and resubmit the claim when payer rules allow. | Appeal healthcare underpayments with supporting contract terms for claim reprocessing. |
| Prevention | Improve coding accuracy through charge capture, audits, and Clinical Documentation Improvement (CDI) programs. | Use reimbursement monitoring, contract management, and automated payment variance analysis. |
Recovery Process for Healthcare Underpayments
Healthcare underpayments are a consistent revenue challenge, making a structured recovery process essential. A structured underpayment recovery program involves several distinct stages, each feeding into the next to ensure that missed revenue is:
- Identified
- Substantiated
- Collected
Here is a step-by-step breakdown:
Claim Identification
The first step in healthcare underpayments recovery is claim identification. In this step, every claim paid is reconciled against the expected reimbursement. The billing team does not solely rely on flagged exceptions.
Practices that focus only on claim denials often overlook recoverable underpayments. Therefore, every service provider and facility must have a dedicated identification workflow.
Payment Variance Analysis
Once the claim identification is complete, each paid claim is compared to the expected amount to check for variance. The expected amount is typically determined using the:
- Contract terms
- Payer’s fee schedule
- DRG grouper output
The simplest explanation of a payment variance is any discrepancy between the expected and actual payment. But does that mean every variance qualifies as a recoverable underpayment? Absolutely not.
Some variances may originate from accurate contractual adjustments. Therefore, the billing staff must carefully assess each case.
Contract Review
When the variance analysis is complete, the provider reviews the payer contract and cross-references it with the claim in question. The contract review helps the service provider determine the reason for the payment discrepancy.
For instance, it may be due to an outdated or misloaded fee schedule. Similarly, it may also occur due to poor interpretation of contract language.
Other factors, such as multi-tier reimbursement rules for implants, high-cost drugs, or ambiguous contract carve-outs, may also contribute to underpayments.
Appeal Preparation
The next step in the healthcare underpayment recovery process is preparing a formal appeal. The appeal typically includes:
- Original claim
- ERA/EOB
- Relevant contract excerpt
- Precise calculation of the variance owed
Important Billing Tip: Strong appeal documentation can significantly shorten the payer response time.
Payer Negotiations
Claims involving healthcare underpayments may often involve ambiguous recurring systemic errors or complicated contract language. The recovery team engages the payer’s contracting department directly to resolve these errors.
Resolving issues addresses the current underpayment and helps prevent similar underpayments in the future.
Follow-Up
Healthcare underpayment recovery requires constant monitoring and follow-up. Appeals should be tracked according to each payer’s appeal filing deadlines and expected response timeframes.
Recovery efforts should be escalated if the payer fails to respond within the contractual or policy-defined timeframe.
Revenue Posting
Revenue posting should begin as soon as the payer issues a corrected payment. Any additional revenue should be accurately posted to the patient account and reconciled.
The final payment should then be reviewed against the original variance to verify that the full contractual reimbursement has been recovered.
Performance Monitoring
The performance of the healthcare underpayment recovery program should be monitored continuously to identify process gaps. These may include:
- Recovered amounts
- Aging trends
- Payer-specific error patterns
The details are typically reported back to the revenue cycle leadership and care teams. It improves contract negotiations and prevents missed revenue in the future.
KPIs to Measure Underpayment Recovery Success
The success of any underpayment recovery greatly relies on the efficiency of the system. The system comprises certain key performance indicators (KPIs). These may include:
Underpayment Identification Rate
The underpayment identification rate measures the percentage of processed claims identified as underpaid. If underpaid claims are not identified, they can never be disputed or recovered.
Therefore, it is an important KPI for recovery.
Recovery Rate
The recovery rate determines the dollar amount recovered as a percentage of the total identified healthcare underpayments. The recovery rate is one of the most evident representations of the recovery system’s efficiency.
Average Number of Days to Resolution
This KPI measures the average time required to resolve an underpayment, from identification through payment correction. It is the time elapsed between identifying a variance and the correct payment posting.
Appeal Success Rate
The appeal success rate indicates the percentage of submitted appeals resulting in additional reimbursement. A higher appeal success rate generally reflects a more effective recovery process and increased reimbursement recovery.
Underpayment Rate
The underpayment rate by payer measures the percentage or number of claims underpaid by each payer. It can be used to detect payers with recurring or worsening variance patterns.
Once recurring payer-specific trends are identified, providers can address them through contract reviews, appeals, or discussions with payers.
Recovered Net Revenue
The recovered net revenue is the top-line indicator of the recovery program’s financial impact. It measures the total additional reimbursement recovered through successful appeals for healthcare underpayments and payment corrections.
Zero-Balance Account Recovery Rate
This KPI measures the dollar value and number of recoveries obtained from accounts that were previously considered paid and closed.
This metric helps providers identify revenue opportunities that might otherwise remain hidden in closed accounts.
Benefits of Healthcare Underpayment Recovery
Healthcare underpayment recovery offers multiple benefits that may go unseen. These may include:
Stronger Payer Accountability
Tracking healthcare underpayments provides objective evidence of how payers apply contractual reimbursement terms in practice. If reimbursement variances are documented consistently, organizations have a better chance of:
- Resolving disputes
- Monitoring payer performance
- Supporting contract negotiations
This enables providers to support contract renewals and negotiations with objective reimbursement data rather than individual claim examples.
Improved Billing Compliance
Regular reimbursement reconciliation helps providers maintain accuracy and consistency in:
- Payments
- Contractual adjustments
- Financial records
Additionally, regular monitoring creates a transparent audit trail, reducing the risk of discrepancies.
It also helps practices identify coding issues or interpretation problems regarding the contract. This way, they can be mitigated before resulting in a regulatory or billing concern.
Recaptured Revenue
Identifying and recovering healthcare underpayments ensures healthcare organizations recover revenue that may go unnoticed. Even a small number of unrecovered underpaid claims can result in significant revenue loss over time.
Similarly, analyzing the reasons for underpayments allows organizations to identify and address recurring issues. These efforts help prevent future revenue leakage rather than simply correcting past payment errors.
Improved Cash Flow Predictability
Prompt identification of reimbursement variances shortens the time between claim payment and payment correction.
Faster identification of underlying issues reduces delays in appeals and payment corrections. When issues are reduced, the service providers experience stable cash inflows.
Additionally, with predictable reimbursement patterns, practices get better financial forecasting and support. This supports more accurate budgeting, operational planning, and revenue forecasting.
Better Resource Allocation
Analyzing reimbursement variances helps providers identify the root causes of payment issues. Typically, errors may originate from:
- Charge capture
- Patient registration
- Payer adjudication
- Insurance verification
- Coding
- Documentation
These insights enable revenue cycle teams to focus their efforts on the areas that require improvement. This reduces recurring errors, minimizes revenue leakage, and improves operational efficiency.
Underpayment Recovery Best Practices
Learning the best practices for underpayment recovery ensures service providers create an efficient recovery system. It can effectively recover additional revenue and prevent recovery bottlenecks. Some of the best practices include:
- Prioritize and group accounts by financial impact and payer. This helps focus on review efforts along the highest recovery opportunities.
- Create and maintain an up-to-date and centralized record of payer contracts and fee schedule amendments. This ensures accurate reimbursement validation.
- Reconcile paid claims and contracted reimbursement rates and avoid relying on payer-flagged cases alone.
- Create a well-structured zero-balance account for review. Accounts marked as resolved may still include several healthcare underpayments.
- Share root-cause findings with coding, registration, and managed care teams to prevent recurring reimbursement issues.
- Establish an automated payment variance detection and appeal generation system. Without these systems, manual reviews are less effective due to the high volume of claims.
- Monitor and track payer-specific appeals and their deadlines. Also, keep an eye on escalation pathways for maximized recovery.
Once a healthcare practice or facility adopts the best practices mentioned above, streamlining recovery becomes easier.
Why Outsource Healthcare Underpayment Recovery?
Recovering healthcare underpayments is a necessary but often complex process. It requires ongoing analysis and understanding of payer-specific contract terms. However, the capacity to manage underpayment appeals varies across practices and facilities.
As underpayment volumes increase, in-house billing teams often become stretched thin. However, this should not result in overlooked underpayments or missed recovery opportunities.
Instead, practices and facilities should identify and recover underpayments before they lead to permanent revenue loss. For instance, providers should use structured payment variance analysis to identify underpayments and pursue payer-specific appeals and revenue cycle recovery.
If your in-house team is unable to handle these tasks, MediBillMD’s AR recovery services help practices:
- Maximize reimbursements
- Accelerate collections
- Reduce ongoing revenue leakage
