Underpayments in Healthcare: Causes and Implications

Underpayments are an often overlooked challenge of the revenue cycle management process for many healthcare organizations, as detailed in our recent article. Large acute systems to ambulatory practices are grappling with underpayments, which occur when payers fail to reimburse the full eligible amount for services provided. The common causes can be classified into four main categories: people, process, technology, and payers.

1. People-related challenges include:
   • Capacity constraints: Healthcare organizations often face resource limitations when it comes to pursuing underpayments. The underpayment team, despite its potential for a high return on investment, may receive inadequate attention and resources.
   • Limited knowledge and skill sets: The individuals responsible for managing underpayments may lack the required expertise and skills, leading to suboptimal efforts in identifying and addressing underpayments.
   • Understanding front-end denial causes: Healthcare organizations may struggle to grasp the root causes of front-end denials and their impact on overall reimbursement rates.
   • Lack of alignment between teams: A lack of alignment between revenue cycle operations and internal managed care teams can result in inefficiencies and wasted efforts.
2. Process-related challenges include:
   • Interpreting contract terms: Differences in the interpretation of contract terms between healthcare organizations and payers can lead to discrepancies in eligible reimbursement rates.
   • Incorrect calculation of allowed amounts: Errors in calculating the allowed amount for services can result in underpayments.
   • Reactive-only approach: Some organizations adopt a reactive approach to denials, addressing issues only after they occur, leading to increased rework and costs.
   • Volume prioritization: Inefficient prioritization of underpaid claims can result in resources being misallocated and systemic issues going unaddressed.
   • Suboptimal processes: Inadequate processes governing handoffs between revenue cycle operations and managed care can hinder the identification and quantification of underpayments.
3. Technology-related challenges include:
   • Lack of robust systems: Many organizations rely on outdated systems, including EMRs, practice management systems, or manual Excel-based models, to identify potential underpayments.
   • Data integrity challenges: Data integrity issues can make it difficult to trust the data and take action on potential underpayments.
   • False positives: Without a robust external contract management system, healthcare organizations may encounter false positives of underpayments, leading to unnecessary research efforts.
4. Payer-related challenges include:
   • Incorrect pricing: Payers may price claims incorrectly by using outdated or inaccurate contract terms, putting the onus on healthcare organizations to monitor and hold them accountable.
   • Margin protection: Payers may engage in margin protection strategies, which can lead to underpayments.
   • Lack of standardization: Lack of standardization in rate cards for complex claims across states can create ambiguity and contribute to underpayment volumes.
   • Payment variance: Payments may not align with contractual terms due to misinterpretation, margin protection, or creative interpretations by payers.
   • Incorrect DRG application: Payers may inaccurately assign DRGs to lower reimbursement rates.
   • Incorrect bundling: Incorrect bundling of services can cause healthcare organizations to miss out on reimbursement.
   • Timely contract loading: Payers may fail to load contracts in a timely manner, leading to outdated fee schedules and reimbursement challenges.
   • Nonpayments: Some payers may deny payment for services or not respond, leading to no response and contestable scenarios.

Addressing the multifaceted issue of underpayments in healthcare requires a combination of resources, expertise, technology, and collaboration between healthcare organizations and payers. By proactively identifying and addressing underpayment, healthcare organizations can protect their financial health and ensure fair reimbursement for the critical services they provide to patients.

Listen to our webinar, “Underpayment Recovery and Its Impact on Your Bottom Line” to learn more and watch for the next article in our series that outlines a seven-step framework for quantifying underpayment issues.