Published: Feb 06, 2023
Updated: Apr 23, 2024
Revenue Cycle Management

Underpaid Claims in Healthcare: What Providers Need to Know

Rex H.
Rex H.
8 minute read
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If you’re not tracking your underpayments, you’re not alone. When flat-out denials constitute more revenue risk AND your payers alert you to them, of course it seems more time-effective to pursue these, particularly when staff time is limited. Most providers focus on denials. 

But when healthcare organizations start recouping big sums like TeamHealth ($10 million), Envision Health ($92 million), and one of our clients ($10 million), you have to wonder how much revenue you're missing out on.

Healthcare providers are legally entitled to the reimbursements listed in their contracts. Laws and procedures are in place to ensure that when your organization submits a bill or invoice to the insurance company, the patient’s claim is covered and the provider’s services have been reimbursed.

Unfortunately, as cases like the above illustrate, too many claims are underpaid. Many providers underestimate the revenue leakage caused by underpayments.  

What are Underpaid Claims?

An underpaid claim is a medical billing term for when you receive a reimbursement lower than the amount is stipulated in your contract. Underpayments occur for a number of reasons, including billing and coding errors, miscommunications between the insurance company and the healthcare provider, and faulty processes on the part of the payer.

Underpaid claims are different from denied claims, which are claims that are rejected in full. When a claim is denied, the provider does not receive any payment from the insurer. Underpayments are so often overlooked because at least some amounts have been received. 

Take a quick, self-guided tour through a powerful underpayments detection tool:

The Causes of Underpaid Claims in Healthcare

Both insurers and healthcare providers contribute to the problem of underpaid claims. Contracts, billing, and coding errors are the top causes of underpayment. Although both sides share responsibility for contractual compliance and accurate coding, each side has its own duty to follow the rules.

Contractual errors on the payer’s side

According to one AMA review, commercial health insurers have a claims processing error rate of 19.3% on average. Insurance claims are paid according to contracts between insurance companies and healthcare providers. However, no matter how carefully worded a contract is, payers can perceive some clauses as unclear or open to interpretation.

One example is the “lesser of” clause. This standard clause allows the insurance company to pay the amount billed, even if it is lower than the contracted amount. For instance, if the contracted payment for a service is $200, and the provider bills $100, the insurer is entitled to pay the “lesser of” the two figures because the total service only came to that amount. This saves the insurance company $100 and costs the healthcare provider $100.

The insurance company is not required to let the provider know that it is paying the “lesser of” amount and may not realize there is a difference in interpretation over the costs of care. The best practice is for providers to be aware of these issues and look for ways to correct them.

Transferring to a new insurance company can lead to communication errors and misunderstandings. Insurance companies are not all created equal, and a contract with one will not be identical to another. Although billing codes are usually interchangeable, costs are not. Therefore, reviewing your contracts carefully when switching insurance carriers or when any changes are made to the existing contract is important.

Coding and documentation errors on the provider’s side

Even when insurance companies want to pay 100% of the contracted cost, they can only pay what they are billed. Coding and documentation errors made on the provider’s end account for claim denials and underpayments. Providers can avoid these mistakes with a few careful steps on their own.

  • Certified medical coders. Coders need a good understanding of medical practices, disease processes, and coding guidelines. The coder should be able to spot mistakes in the code being applied.
  • High-quality tech. Software coding systems will keep track of ICD-10 codes, CPT, and HCPCS for you and ensure proper code matching where necessary. Most coding systems are compatible with your existing case management systems (CMS), so you can bill directly from your case files.
  • Intentional under-coding. Some companies deliberately miscode their services in a misguided effort to stave off audits. This leaves money on the table and skews Medicare and other healthcare statistics.

The safest thing for providers is to use the best coders and up-to-date software and bill for what you are entitled to receive. However, documenting your services is never the wrong approach. If litigation becomes necessary, you will have all the invoices and notes your attorney or legal department will need to make a case for the correct cost of services.

To review the healthcare industry challenges currently triggering underpayments as well as all the payer and provider causes of underpayments, read our in-depth healthcare underpayments guide

The Impact of Underpaid Claims

Underpayments cost providers tens of thousands of dollars in lost revenue annually, and additional costs for administration and pursuing claims are not included in that figure. One study published in Becker’s Hospital Review found that every year, providers lose one to three percent of their net revenue to payer underpayments. Other studies put that figure as high as 11 percent. We frequently encounter clients who gauge they’re being underpaid by five percent or more every year.  

Financial impact on providers

Therefore, any shortfall to the providers hurts their bottom line. According to the American Hospital Association (AHA), Medicare and Medicaid underpaid pay hospitals jsut 82 cents for every dollar spent on Medicaid patients. The combined underpayment was more than $99.2 billion, twice the amount incurred in 2012.   

When the number one concern of patients and hospitals is the rising cost of healthcare, this lost money should cause great concern to healthcare providers.

Patient access to care

In addition to net revenue loss, providers risk patient satisfaction when underpayments get posted to their accounts. Enough high fees and errors and patients begin to mistrust your practice. 

Quality of care

Healthcare providers operating at low-profit margins cannot compete for clinical and administrative staff during a dire worker shortage that shows no signs of abating. This impacts the level of care being provided to patients. Look again at the $99 billion shortfall from Medicare and Medicaid. That would go a long way toward offering competitive salaries.

If you can recoup even half your underpaid claims, you can go a long way toward improving your care quality and your overall staffing situation.

Strategies for avoiding underpaid claims

It’s best to avoid underpaid claims completely or at least minimize them. Sometimes you will have claims that must be appealed. Being proactive about your coding practices can head off most of your difficulties before appeal becomes necessary.

Up-to-date coding and documentation

Make sure your coding system is updated with all current classifications. There are five systems in use now: ICD-10, CPT, HCPCS, CDT, and NDC. Your coding software should integrate with your CMS platform so that invoicing can be carried out directly from your database. Every year, the AMA updates, deletes and adds hundreds of codes

Complicated coding procedures, like those for cardiology and ophthalmology, may best be left in the hands of those certified for specific specialties. Outside specialists with extensive experience relieve staff and preserve provider net revenue when they submit claims correctly the first time. 

Effective denial management

Your denial management process may be intertwined with your under- and over-payment process. Most claim denials are due to coding errors, and you should be able to spot potential underpayments by checking for denial errors. A streamlined process for weeding out underpayments should improve your revenue stream immediately:

  • Know what you should be paid. Be aware of what the contracted payment should have been, even if the billed amount is correct. If your staff lacks the time to compare every payment coming in to the amount listed in the payer contract, consider contract management software. This software ingests, digitizes, and analyzes every reimbursement, flagging you should there be an underpayment. 
  • Appeal all denials and underpayments immediately. Don’t wait to discuss or review your own paperwork. Instead, get your appeal going as soon as the denial arrives. Payers are quick to cite timeline misses as legitimate reasons to deny or underpay again. 
  • Use ERISA. The Employee Retirement Income Security Act is a federal law that covers self-paid plans and employee retirement accounts. It also has rules regarding underpayment appeals.

Create a system to review the causes of denials and underpayments so errors can be corrected.

Strong contract negotiation skills

Know what your contract says. Some clauses, like the “lesser of clause," “stop-loss,” and “reduction of charges,” often favor payers. If you’re unsure about what a clause means or what it requires you or the insurance company to do, ask for clarification. Use the healthcare underpayments guide we linked to above. 

Courts will not go outside the “four corners” of the document in a contract dispute. That means that when a contract is litigated, the only thing that matters is what is written in the contract itself. Any agreements you may make with the payer that aren't included in the contract will not be considered.

When it’s time for a contract to be negotiated or renegotiated, be sure that any amounts discussed will give full coverage to the patient’s care and still leave a sufficient profit margin for costs and expenses. If your legal department handles contract negotiations, make your needs and desires known early and often. If you’re handling these discussions yourself, refer to our  contract negotiation guide here

Tools and resources for managing underpaid claims

The two things you need to keep your underpaid claims under control are the technology to ensure your claims are correctly coded and the personnel to handle the software. These are parts of your practice where you should never cut corners. IT is one of the most important departments for heading off potential underpayments in your facility.

Software and technology

Medical coding software takes all the information entered from a patient chart and converts it into the universal codes required by insurance companies for billing purposes. Therefore, all coding systems must use identical codes so that a procedure at one facility is paid the same at another.

The software automatically translates text-to-codes with artificial intelligence (AI) assistance. AI solutions help the software analyze doctor and nurse notes, extract diagnoses and treatments, autocorrect erroneous code entries, and automate recurring billing entries. Automation and AI can also be programmed to flag repeated errors for external correction.

Professional organizations and training

The American Association of Professional Coders (AAPC) is the nation’s largest organization for the certification and education of medical coders, billers, documentation specialists, and other IT professionals. AAPC offers inpatient and outpatient coding, billing, documentation management, and coding instruction certification.

AAPC provides courses in medical coding, auditing, healthcare compliance, and continuing education in professional development and management. Healthcare providers can help their bottom line by ensuring their coders are certified by an organization like AAPC and making the training available to those who want it.

Automatically Detect and Manage Underpaid Healthcare Claims with MD Clarity

Tracking patterns of underpayment from payers doesn't need to be a complex task that requires a lot of manual work in spreadsheets and updating fee schedules. MD Clarity's RevFind software automates the entire process of managing underpaid claims from discovery to assigning appeals. You can sort by highest underpayment opportunities to maximize productivity.

Schedule a demo to see how MD Clarity can help you get paid.

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