Published: Oct 19, 2022
Updated: May 09, 2024
Revenue Cycle Management

Payment Variance in Healthcare: How to Recover Revenue from Underpayments

Rex H.
Rex H.
8 minute read
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Like the 100 Alabama hospitals currently suing Blue Cross for $5 billion and the dozen of hospitals suing the U.S. Health and Human Services Department for billions due to Medicare underpayments, many practices and health systems know payers are short-changing them. 

These healthcare organizations stand to gain quite a bit, mostly because they keep careful track of their payment variance reports. 

Payment variance in healthcare happens when insurers pay the wrong amount, which has many adverse effects on revenue and efficiency. Examples include revenue loss, Civil Monetary Penalties Law liability, False Claims Act liability, and exclusion from federal healthcare programs.

This can significantly impact your business over the long run, especially since reimbursements and budgets are shrinking. Here's what you need to know to identify payment variance and recover revenue from payment variance.

What is Payment Variance?

Payment variance is the difference between what you expect an insurer to pay you on a claim and what they ultimately pay. Payment variance is most commonly underpayment.

You should never ignore payment variance. Recurring underpayment results in revenue loss, while overpayment can cause legal problems. You may be subject to potential Civil Monetary Penalties Law liability, False Claims Act liability, and exclusion from federal healthcare programs if you don't report and return the overpayment:

  • 60 days after the date on which the overpayment was identified
  • By the date on which any corresponding cost report is due (if applicable)

What Is a Payment Variance Report?

A payment variance report in healthcare revenue cycle management is a detailed analysis that compares the expected payment amounts based on contracted rates with the actual payments received from payers.  

Some practice management systems (PMS) offer rudimentary payment variance reports, but specialized revenue cycle management software automates and streamlines the contract management and underpayment recovery process, ensuring accuracy and timeliness in identifying and addressing payment discrepancies. These tools integrate with billing and coding data to track and scrutinize payment variances.

Take a quick, self-guided tour through a powerful contract management and underpayments recovery tool that automatically alerts you to payment variances:

Some healthcare organizations generate these reports using employees like financial analysts or billing specialists, or they might outsource this function to a third-party provider specializing in revenue cycle management.  

Sources of Payment Variance From Underpayment

There are two primary sources of payment variance: payer error and provider error.

Insurer Error

Payment variance can happen when insurers make mistakes, such as:

  • Pricing claims with incorrect contract terms
  • Taking too much time to spot billing errors
  • Lowering the diagnosis-related group complexity to reduce reimbursement
  • Incorrectly bundling or omitting services, causing providers to miss reimbursement
  • Submitting bills without appropriate clinical documentation
  • Interpreting agreement terms differently from the provider
  • Calculating allowed amounts inaccurately

Healthcare Provider Error

Payment variance also occurs when providers make mistakes. These often include:

  • Failing to spot underpayment early
  • Failing to spot the payer's incorrect calculations for the allowed amount
  • Using the wrong contract terms to price claims
  • Interpreting agreement terms differently from the payer
  • Calculating allowed amounts incorrectly

Underpayment Statistics

Unfortunately, payment variance is common throughout the healthcare industry. Here are some statistics:

Private Health Plans

According to the Medical Group Management Association, insurers underpay providers by 7% to 11% on average. Additionally, research from the Advisory Board shows that hospitals are losing five percentage points of their margin to underpayments, suboptimal contract negotiations, and denials on average. 

Medicare and Medicaid

Research by the American Hospital Association has revealed that 67% and 62% of hospitals received Medicare and Medicaid payments below costs in 2020, respectively. Moreover, hospitals only received 84 cents for every dollar spent caring for Medicare patients. Similarly, hospitals were paid 88 cents for every dollar spent caring for Medicaid patients.

How To Recover Revenue From Payment Variance Due to Payer Underpayment

Payment variance due to payer underpayment can have disastrous consequences for your bottom line. Minor errors can add up over time, resulting in thousands or even millions of dollars in underpayment throughout the year. The Advisory Board report mentioned above finds that average hospital loses $22 million every year in underpayments. 

Underpayments also force you to spend resources and time spotting and fixing billing problems. Because it takes so much time to settle erroneous claims, many providers don't rework a significant percentage of claims. As a result, many claims remain underpaid.

Fortunately, there are ways to recover revenue from payment variance due to payer underpayment:

Establish Streamlined Processes For Contract and Pricing Changes

First, create streamlined systems and processes for pricing and contract changes. You can do this by:

  • Creating internal triggers to reduce or eliminate the lag between the effective change dates and your monitoring of payments: Right after establishing a new contract's effective date, analyze your remittance data to ensure that all contract terms are performing as expected.
  • Training and educating your staff: Consider hiring a third party to train your staff to increase collection rates and resolve systemic errors.
  • Using the right technology: Technology-enabled services can help you establish processes for pricing and contract changes. It can also review 835 transaction data. The 835 explains benefits, including how much was denied, paid, bundled, reduced, split, and covered by other payers. If you're unsure where to start, an experienced service provider can recommend suitable systems and process improvements for minimizing and preventing future payment problems.
  • Segmenting payers and monitoring their performance: Create, submit, and review claims from payers in batches. This will help you spot recurring mistakes like old fee schedules and routine underpayments.

Manage Underpayments Using Key Performance Indicators

Key performance indicators are quantifiable metrics for measuring the success of business goals. Use the following KPIs to gauge revenue integrity efforts and prevent and address underpayments:

  • Net collections ratio: This is the percentage of total reimbursement collected from the total allowed amount. It reveals the impact of denial, underpayment, and other factors on revenue.
  • Days in accounts receivable: This represents the average time it takes for a submitted claim to be paid. The longer you wait, the more your cash flow decreases.
  • The 0-60 percentage: This KPI represents the projected cash inflows as a percentage of insurance accounts receivable aging in two of the youngest buckets: 0-30 days and 31-60 days. The former bucket is for services billed zero to 30 days ago, while the latter is for services billed 31 to 60 days ago.

Focus on the Most Challenging Areas of Payment Accuracy

Certain payment accuracy areas are more likely to result in underpayment, including:

  • Outpatient Ambulatory Payment Classification Medicare claims
  • Stop-loss terms
  • Carve-outs like high-cost drugs and implants
  • Billed amount, length of stay, and diagnosis-related group outliers

When reviewing, negotiating, and renegotiating claims, pay special attention to these areas.

Consider Low-Dollar Variances

Most providers have a variance threshold — the minimum payment discrepancy value for pursuing claims with payers. 

Usually, the variance threshold falls between $500 and $1,000, and lower-dollar denials and claims are dismissed as contractual allowances — parts of a patient's bill that a hospital or doctor must write off due to billing agreements with the patient's insurance company.

However, the vast majority of payment discrepancies are much smaller. They're also incredibly common, as covered above. If your practice has a large volume of low-dollar variances, you should consider addressing them instead of writing them off. Otherwise, you will forgo tens or hundreds of thousands of dollars in revenue. Case in point: you will lose $30,600 in annual revenue if you write off 3,000 variances every month valued at an average of 85 cents. If the average payment discrepancy goes up to $20, you'll forgo $720,000 in revenue.

The best way to work low-dollar discrepancy is via reliable automation services. Such services can accurately spot and group variances for bulk appeal submissions. Alternatively, you can hire experienced revenue recovery specialists to help you recover large volumes of low-dollar variances effectively and efficiently.

Use Federal ERISA Appeals

Finally, you can use federal ERISA appeals to recover revenue from underpayment.

Short for Employee Retirement Income Security Act, ERISA is a federal law that governs self-paid insurance plans and employee retirement accounts. According to ERISA, health insurance companies are legally obliged to clear underpayments.

As such, you can use federal ERISA appeals to address underpayments. If a payer denies your initial appeal, ask for a copy of the patient's policy and send it to the payer's legal department. Mention ERISA in your appeal to remind the legal department that the patient's policy is protected by federal law.

Know When Payment Variance Is Due to Inaccurate Reimbursement Based on What You're Owed Contractually

Payment variance is often the result of inaccurate contractual reimbursement. According to the Comprehensive Error Rate Testing program, Medicare had an improper payment rate of 6.26% in 2021, which amounted to a staggering $25.03 billion in improper payment amounts.

To reduce payment variance, you must understand why payers make contractual adjustments. You can then leverage health contract management software to adjust your expectations and processes accordingly.

Contractual Adjustments and Allowances

Contractual adjustments or allowances can happen for many reasons. They typically stem from legitimate modifiers and codes such as:

Medicare Electronic Health Record Incentive Program

The Electronic Health Record Incentive Program offers bonus payments to eligible healthcare professionals who demonstrate meaningful use of certified Electronic Health Record technology.

The total payment depends on the year you begin participating in the program. If you started in 2013, you could receive up to $28,220 in total payments. However, if you started in 2014, you may receive up to $23,520.

The last year for starting participation and receiving incentive payments in the Medicare program was 2014. For Medicaid, 2016 was the last year to begin participating and receiving incentive payments.

Multiple Procedure Payment Reductions

Under multiple procedure payment reduction rules, Medicare will usually only pay full price for the highest-valued procedure when a healthcare provider performs multiple procedures in a single patient encounter. For the second and subsequent procedures performed during the same encounter, Medicare will pay around 50%.

Note that reductions are calculated differently depending on the procedures or services involved. For instance, when multiple endoscopic procedures in the same code family are performed, the "base" value of the endoscopy will only be paid once. Special rules also apply to certain therapy services and diagnostic imaging, ophthalmology, and cardiovascular services.

Physician Quality Reporting System

The Physician Quality Reporting System applies negative payment adjustments to eligible healthcare providers who fail to adequately report data on quality measures for covered services given to Medicare Part B fee-for-service beneficiaries.

Eligible professionals can choose from different reporting options for either group or individual measures. Reporting options are also available to satisfy both meaningful use and Physician Quality Reporting System reporting requirements.

Provider Credentials

Some states allow reduced rates when payers are billed for services by advanced care practitioners. Common examples of advanced care practitioners include physician assistants and nurse practitioners.

Value-Based Payment Modifier Program

The Value-Based Payment Modifier Program adjusts Medicare Physician Fee Schedule rates based on an eligible healthcare professional's performance on cost and quality categories.

This program is based on your performance during the last two years. For instance, if you applied to the program in 2017, your 2015 performance will be evaluated.

Since 2017, all group and solo practitioners have been subject to this program. In 2018, solo and group practitioners received a downward, neutral, or upward payment adjustment based on quality tiering. Physicians who did not demonstrate lower costs or higher quality often received lower payments.

Partially Furnished Procedures or Services

When a procedure is terminated, reduced, or partially furnished by another provider, it may impact your expected allowable.

Unauthorized Discounts

Lastly, unauthorized discounts can have a significant impact on your expected allowable. According to an American Medical Association report, unauthorized adjustments and discounts eat up 54 cents of every dollar.

Leverage Software That Allows You To Track Underpayments

The best way to spot payment variance is via healthcare contract management software. These platforms provide peace of mind and boost your bottom line by ensuring you collect every dollar earned per payer contract. Specifically, they can:

  • Capture all adjustment and payment transactions
  • Track at the encounter level
  • Pinpoint underpayment patterns

Appeal Identified Underpayments

Using your healthcare contract management software, your staff can pull reports much more efficiently. This allows them to address underpayments ranked by the highest recoverable opportunity.

When one Minnesota ophthalmology group with five clinics and ASCs faced increasing patient volume and contract complexities, it knew its senior patient contracts manager would need support. The group’s CFO had long sought transparency into its underpayments and contract compliance to fully recoup all revenue. The software solution it chose went to work uncovering underpayments, evaluating contract performance, and finding the data to help them negotiate with payers for better terms and reimbursements. 

Within months, this group began enjoying these benefits: 

  • insights on which payers, codes, and combinations of those triggered the most underpayments
  • revenue recovery
  • consistent contract renewal compliance
  • avoidance of additional hires

Renegotiate Contracts Using Insights Gained From Software

Besides identifying and appealing underpayments, healthcare contract management platforms provide data on payer actions that you can use for future contract negotiations. Specifically, you can negotiate from a position of strength by demonstrating that some payers are performing worse than others.

Healthcare contract management software also empowers you to:

  • Bring transparency across the revenue cycle
  • Compare underpayments by payers
  • See how your insurance contracts are performing
  • Predict cash flows impacts of contract changes

Recovering Revenue From Payment Variance

Pursuing payment variance in healthcare can save you meaningful revenue in the long run. Capture this revenue by:

1. Establishing processes for contract and pricing changes

2. Managing underpayments using key performance indicators

3. Focusing on the most challenging areas of payment

4. Considering low-dollar variances

5. Using federal ERISA appeals

You can discover when inaccurate reimbursement is causing payment variance by:

1. Understanding why payers make contractual adjustments and allowances on payment

2. Leveraging healthcare contract management software to track and appeal underpayments

3. Renegotiate contracts using insights gained from the healthcare contract management software

 Identify and Address Underpaid Healthcare Claims with MD Clarity

You don't need to struggle with complex, manual processes in spreadsheets or constantly update fee schedules to track underpayment patterns from payers. MD Clarity's RevFind software simplifies the entire workflow of handling underpaid claims, from initial detection to coordinating appeals in a work queue, and allows you to prioritize the most significant underpayment opportunities to enhance productivity. RevFind ingests, digitizes, and analyzes contracts. Centralizing them in one location ensures easy access for as many users as you choose. It compares each payment to payer contract terms and alerts staff to discrepancies. Pursuing underpayments can result in millions of dollars in cash recovered and improved margins.

Book a demo to discover how MD Clarity can assist in securing your payments in full.

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