Underpaid Claims in Healthcare: What Providers Need to Know

Healthcare providers want to be paid. 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, a claim may be paid without being fully paid. One of the reasons for lost revenue and unnecessary administrative costs in the healthcare industry is underpaid claims. Many providers underestimate the revenue leakage of underpayments and should be tracking underpayments.

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What are Underpaid Claims?

An underpaid claim is a medical billing term for when you receive less in settlement than the expected value of a claim. Underpayments happen because of contractual, billing, and coding errors and miscommunication between the insurance company and the healthcare provider.

A fully paid claim is when the full value of the services provided is paid according to the terms of the contract. If the contract requires the insurer to pay the contracted amount regardless of the bill received, paying the billed amount would be an underpayment, and paying the contracted amount would be a full payment.

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.

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 Payer’s Side

According to industry statistics, 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, there may be clauses that are 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.

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.

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.

Coding and Documentation Errors on 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 account for a large percentage of 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.

The Impact of Underpaid Claims

The harm caused by underpaid claims may be difficult to appreciate. 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.

Financial Impact on Providers

Providing healthcare is not cheap. Doctors, clinics, and hospitals are entitled to adequate compensation for their work. Medicare and Medicaid, which provide coverage to elderly and disabled patients, account for a substantial percentage of healthcare reimbursement annually. About 7-11% of all government and commercial insurance claims are underpaid, as reported in a recent study.

Therefore, any shortfall to the providers hurts their bottom line. According to the American Hospital Association (AHA), 67% of hospitals were underpaid by Medicare, and Medicaid underpaid 62% of hospitals in 2020. The combined underpayment was more than $100 billion. In addition, the American Medical Association estimates that private insurers were responsible for an additional $17 billion in unpaid and underpaid claims as of 2011.

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

Underpayments must be corrected, and the patient must usually make the corrections. This leads to patient dissatisfaction. The new (incorrect) amount will be posted to the patient’s account, and the patient will experience the medical version of sticker shock. When this happens too often, patients begin to mistrust your practice.

A Senate investigative committee found that, among other problems with underpayments, patients seek out-of-network healthcare providers in the mistaken belief that this is a better or special service. As a result, carriers routinely underpay these claims, leaving patients with the remaining costs. Patients who are unable to pay higher costs will avoid healthcare until it is absolutely necessary.

These underpayments result in patients lacking access to proper medical care. Just because patients choose to avoid healthcare does not relieve providers of their duty to offer better services. Access limited by poor billing practices is easy for providers to fix and has little to do with the quality of service being provided.

Quality of Care

According to a report by the Brookings Institute, healthcare workers other than doctors and RNs, such as aides, housekeepers, cooks, and janitors, are seriously underpaid. However, these are the people who encounter patients regularly, especially in nursing homes and hospitals. If they are unhappy with their pay or the equipment or facilities they are required to work with, they aren't likely to give patients the best possible care.

Healthcare providers operating at low-profit margins cannot always pay workers what they know they deserve. This impacts the level of care being provided to patients. Look again at the $100 billion shortfall from Medicare and Medicaid. That would go a long way toward paying workers, improving facilities, and upgrading equipment in every facility in the country.

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.

Your medical coder should be certified and, ideally, be well-versed in medical terminology. Coders who don’t understand what they are entering cannot catch mistakes and won’t know, for instance, if they’ve entered the wrong code for a procedure.

Effective Denial Management

Your denial management process also handles 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.
• 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.
• 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.

Your CMS should flag all denials and underpayments as soon as they come in so they can be promptly addressed. You should also 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," favor the insurance company. If you’re unsure about what a clause means or what it requires you or the insurance company to do, ask for clarification.

You should understand that 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 insurer or arrangements between you and a supplier 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.

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 areas to head off potential underpayments in your facility.

Software and Technology

Medical coding software takes all the information entered from a patient chart and converts them 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. 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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