Underpayments: Causes, Implications, and Recovery

Billing

Date Posted: Thursday, April 17, 2025

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From large acute systems to ambulatory practices, healthcare organizations are plagued by an often-overlooked but significant revenue challenge: underpayments.

Occurring when payors fail to reimburse the full eligible amount for healthcare services provided, underpayments are a multifaceted issue requiring a combination of resources, expertise, technology, and collaboration between healthcare organizations and payors to resolve. By proactively identifying and addressing underpayments, healthcare provider organizations can protect their financial health and ensure fair reimbursement for the critical services they provide to patients.

Root Causes

The primary causes of underpayment can be categorized into four key areas: individuals, processes, technology, and payors.

People-related challenges revolve primarily around resource limitations. Despite its potential for a high return on investment (ROI), the underpayment team may receive inadequate attention and resources, or team members may lack the required expertise and skills, leading to suboptimal efforts in identifying and addressing underpayments. The organization may also struggle to grasp the root causes of front-end denials and their impact on overall reimbursement rates, or a lack of alignment between revenue cycle operations and internal managed care teams can result in inefficiencies and wasted efforts.

Process-related challenges include differences in the interpretation of contract terms between provider and payor, which can lead to discrepancies in eligible reimbursement rates.

Other process challenges include:

Errors calculating the allowed amount can result in underpayments.
Inefficient prioritization of underpaid claims, resulting in resources being misallocated and systemic issues going unaddressed.
Inadequate processes governing handoffs between revenue cycle operations and managed care hinder the identification and quantification of underpayments.

Regarding technology-related challenges, many provider organizations rely on outdated systems, including EMRs, practice management systems, or manual Excel-based models, to identify potential underpayments. Data integrity issues also arise, making it difficult to trust the data sufficiently to act on potential underpayments. Additionally, without a robust external contract management system, healthcare organizations may encounter false positives of underpayments, leading to unnecessary research efforts.

Payor issues are a leading cause of underpayments, including the use of outdated and inaccurate contract terms that result in incorrect claim pricing. Provider organizations are responsible for monitoring and holding them accountable. Payors may also engage in margin protection strategies, fail to load contracts in a timely manner, or incorrectly bundle services.

Other common payor problems contributing to underpayments include the lack of standardized rate cards for complex claims across states, which can create ambiguity and contribute to underpayment volumes, as well as the incorrect assignment of DRGs to lower reimbursement rates. In some cases, payments may not align with contractual terms due to misinterpretation, margin protection, or creative interpretations by payors.

A Seven-Step Framework for Quantifying the Issue

To effectively tackle the underpayment issue, healthcare organizations can follow a structured seven-step framework for quantifying underpayments and maximizing revenue recovery. The following should be performed on an annual or fiscal basis to establish a recurring yearly ROI.

Analyze Data: Start by collating accounts with a zero balance that have already been paid, specifically those without denials. A zero balance analysis (ZBA) is crucial to identify underpayments that often go unnoticed. It provides the foundation for accurately quantifying the issue.
Identify Net Revenue: Next, analyze various contracts, carve-outs, and fee schedules to determine the appropriate eligible reimbursement amount for each account. This step can be labor-intensive and challenging when done manually, emphasizing the need for robust contract management technology.
Calculate High-level Underpayment Opportunity: Determine the underpayment opportunity by applying underpayment industry benchmarks to financials. Additionally, analyze underpaid amounts by financial class to refine your estimate further.
Determine Recovery Opportunity: Apply a recovery rate based on historical data and account for false positives. While benchmarks provide a gross opportunity, not all underpayments can be recovered. Apply a conservative percentage to estimate realistic recoveries.
Evaluate Technology Costs: Determine the technology costs required to pursue underpayments effectively. This may involve implementing new technology, optimizing existing systems, or loading new contracts into contract management technology. Technology is essential for streamlining the process and achieving accurate results.
Assess Services Costs: Evaluate whether reallocating or adding internal staff is necessary to pursue underpayments. Alternatively, consider partnering with external underpayment service providers to manage the underpaid claim workload cost-effectively.
Calculate ROI: Finally, calculate the ROI by subtracting the technology and service costs from the revenue opportunity. This step clearly shows the net opportunity for revenue recovery.

Conducting a comprehensive data analysis empowers healthcare organizations to gain insight into their resource efficiency, payor behavior, and claim lifecycles. It provides a proactive approach to address underpayments and optimize revenue recovery.

Custom Approach

Given the complexities in the healthcare revenue cycle, a customized approach to underpayment recovery is most effective. Each health system has its unique challenges, operational framework, and financial goals, necessitating tailored underpayment recovery services to address and resolve their specific underpayment issues.

Healthcare organizations should look for a partner with a spectrum of solutions that offer customizable options for targeted revenue recovery efforts designed to integrate seamlessly into their existing operational frameworks. By selecting the right option based on their current state, they can recoup lost revenue and gain valuable insights to prevent future underpayments.

Options include:

Managed services target staffing assistance for understaffed healthcare organizations with an existing contract management tool. The model utilizes data-driven insights to inform allocation strategies for previously identified underpayments and direct them to recovery specialists.
Analytics-enabled models leverage existing client technology to stratify existing underpayments and perform zero balance analyses on simple fee structures and contracts.
Full-service models provide comprehensive assistance, including services, contract management technology, and analytics, for providers with or without a contract management tool or specialists to manage underpayments and facilitate future contract negotiations.

Adopting a tailored approach enables healthcare organizations to swiftly identify revenue gaps and experience revenue recovery within a short period. It also enables a more in-depth analysis of trends and underlying causes, laying the groundwork for the development of effective remediation plans and mitigation strategies.

By closely collaborating with managed care teams and refining contract management processes, payor accountability can be increased, and provider organizations can position themselves more favorably for future negotiations. Strategic alignment and data-driven insights enable the recovery of lost revenue, paving the way for sustained financial growth and stability.

Matt Bridge is Senior Vice President of Strategic Solutions with AGS Health.