With hospitals facing unprecedented financial strain lately, the idea of leaving money on the table is not a choice. Several hospitals annually lose 1% to 10% of their net revenue due to underpaid claims, i.e., money they are contractually due.
In such a situation, both identifying and addressing underpayments are the need of the hour.
In this blog, we explain everything about underpayments, from its meaning to some effective strategies to successful underpayment recovery.
What are Underpayments?
An underpayment, as the term itself suggests, is a partial payment. Underpayments in a hospital occur when payors do not fully reimburse for the services provided to their beneficiaries or when providers under-bill for the care provided.
Now, underpayments in healthcare cause due to several reasons; some of them are as follows:
Reasons Related to Payors
- Contractual Underpayments: In this, the payor fails to pay completely for the terms included in a contract, especially those complex terms such as high-dollar stop-loss, carve outs, escalators, and lessor-of language.
- Processing Errors: In this, payors themselves make errors while calculating the owned amount or processing the claim for payment
Reasons Related to Revenue-Cycle
- Charge-Capture Issues: This basically involves clinical data management (CDM) inaccuracy, charges related to lessor-of language and pharmacy multiplier mistakes
- Coding Issues: This includes inappropriate coding of DRGs (Diagnosis-related groups), missing diagnosis, inaccurate procedure order and transfer DRG errors
- Medical Billing Issues: This includes alternate revenue code logic, payor-specific edits and appropriate capture of specialty payments such as IMEs (indirect medical education payments)
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How to Identify Underpayments?
Here are three effective ways to identify underpayments in healthcare:
Systematic Payment Analysis
Catching underpayments requires regular monitoring of payments against contracted rates. This includes evaluating the difference between the amount expected in reimbursement and the amount received and comparing EOBs for any discrepancies.
The routine process of monitoring the pattern of payment among healthcare providers, particularly in high-volume procedure areas and among payers that frequently reflect discrepancies, helps identify trends and recurrent issues that may suggest systematic underpayment problems.
Automated Payment Verification
You can also use technology and automated software to track payments in real time. Needless to say, automated processes can briefly show when actual payments are not met and notify staff of potential underpayments.
Several technologies also compare actual payments against contracted rates and fee schedules, which eliminates the time-consuming manual review as well as reduces the risk of human errors. The right technology can also ensure continuous monitoring and prompt identification of payment discrepancies.
Regular Contract Compliance Audits
One of the key factors to identify underpayments is maintaining up-to-date knowledge about payer contracts. This includes having a comprehensive database of contract terms, rates and special payment arrangements.
Regular audits of these contracts, such as tracking anniversary dates and rate increases, make sure that payments are according to the most current agreement. This proactive approach often helps prevent underpayments before they occur and gives good documentation for payment appeals.
Steps to Successful Underpayment Recovery
Your underpayment recovery plan should both identify and correct issues that keep your organization from being paid optimally and in compliance with your established contracts.
Underpayment management requires analysis and understanding of revenue cycle processes and how they impact reimbursement from time of registration to final payment.
All that said, here are three easy steps to recover from an underpayment:
Identify: Get a Clear Picture of Recovery Opportunities
A systematic process to identify underpayments is necessary. Hospitals can build a team of reimbursement experts that can roll out comprehensive guidelines for payment verification.
You can also utilize the three strategies we discussed in the previous section. You may also rely on an RCM solutions provider who will dig deep into revenue issues, evaluating claims data, contract terms, and payment histories. Always remember that combining human efforts and technological capabilities can create an effective identification system, which catches underpayments in no time.
Recover: Prioritize and Act
Recovery stage requires a thoughtful, strategic focus. As already mentioned earlier, start by building a dedicated team and provide them with the right tools and authority to recover underpayments.
Identify a procedure to group similar underpayment cases to process and appeal more effectively. In addition to this, develop automated workflows for standard appeals to make the recovery process faster.
Determine priority levels based on dollar amounts, aging, and probability of recovery. This would allow your team to concentrate on the most impactful cases first.
Resolve: Focus on Prevention
Prevention is the ultimate goal in managing underpayments. So, do root cause analyses to understand the major reasons for underpayments and implement strategies to ensure those issues don’t happen again. Lines of communication between revenue cycle teams should always be kept open, so that they can share quick feedback about any mistake that is identified.
Collaborate closely with managed care teams, sharing trending reports and escalation data to strengthen future contract negotiations.
Regular staff training and updates on payer policies help prevent common mistakes. Remember, each recovered underpayment provides valuable insights for preventing future revenue leakage.
Parting Thoughts
Staying ahead of underpayments in today’s complex healthcare landscape requires more than just internal planning. As reimbursement models become increasingly complex and payer requirements constantly evolve, healthcare organizations can benefit from partnering with revenue cycle management experts.
These specialists bring advanced analytics, dedicated resources, and industry-wide insights that can transform your underpayment recovery process from reactive to proactive. By leveraging external expertise, you not only recover lost revenue but also gain access to best practices, cutting-edge technology, and specialized knowledge—ensuring your organization maximizes its rightful reimbursements while your team focuses on what matters most—patient care.
