Underpayments/under-reimbursement represent a major source of revenue leakage for healthcare organizations. Underpayments have become common and are often “silent”, meaning that payment is received but it is below what was owed. The financial risks of underpayments in medical billing are huge. According to Becker’s Hospital Review, providers lose about 1 to 3% of their net revenue annually due to underpayments, and that roughly 11% of all claims are underpaid or denied. Provider reimbursement issues pervasive, affecting practices and systems of all sizes. With insurance companies increasingly under-reimbursing claims, healthcare revenue cycle management services play a critical role in preventing revenue leakage and optimizing collections.
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What Are Underpayments in Medical Billing?
In medical billing, an under-reimbursement occurs when an insurance company reimburses a healthcare provider an amount that is less than the contracted or expected rate for a valid service–even though the claim was approved. This often results from payer reimbursement errors. To understand what counts as an underpayment in medical billing, let’s see how it’s different from partial payments, claim denials, and payment delays:
- Partial payments are only a portion of the claim, and generally reflect policy and benefit rules. The remaining portion represents non-covered services or patient responsibility (copay, deductible, coinsurance).
- Denials are when payers do not reimburse claims due to coding errors, missing documentation, lack of authorization, or eligibility issues, while under-reimbursement refers to payment at a lower rate.
- Payment delays occur when a claim takes longer than the expected timeframe to get reimbursed.
Denials and delays affect cash flow but do not change the payment amount. Underpayments affect both cash flow and overall revenue capture.
Why do Underpayments happen in Medical Billing?
The common causes of healthcare underpayments can be categorized as payer-related issues, revenue cycle management (RCM) problems, and administrative errors.
- Payer-related issues
Many underpayments arise from payer reimbursement errors, especially when contracted terms and reimbursement processes do not match.
- Outdated fee schedules, missed contract updates, and poor contract management often cause claims to be paid at incorrect rates. Payers may also miscalculate reimbursement when automated systems apply wrong rates, modifiers, or bundling rules.
- Beyond contract-related challenges, payers may reimburse less than the contracted amounts due to internal system flaws, outdated edits, or misinterpretation of policies.
- Misused policies such as inappropriate bundling are another issue–for example, a payer bundling a separately billable evaluation and management (E/M) visit into a minor procedure, even when documentation supports that the E/M service was significant and separately identifiable (and should be billed with modifier -25). Downcoding and incorrect medical necessity decisions by payers also result in lower reimbursement.
Together, these payer-related issues create consistent revenue leakage, making contract compliance and payment reconciliation critical.
- RCM Issues
Underpayments often occur due to internal RCM issues that affect claim accuracy and payment integrity:
- Coding errors and incomplete documentation are major medical billing issues—incorrect CPT/ICD-10 codes, missing modifiers, and insufficient documentation can affect medical necessity, causing payers to reduce payments even when services were fully provided.
- Missing, incorrect, or late claim submissions often lead to payment reductions or rejections. This includes trailer billing—sending follow-up claims after the initial submission when new information or missed services surface. These late submissions can cause delays, partial payments, or denials, especially under strict timely-filing rules, and frequent trailer billing often points to RCM issues like incomplete documentation or workflow bottleneck.
- Posting errors, failure to compare payments against contracted rates, and lack of regular reconciliation checks often prevent practices from identifying when payers reimburse less than they should.
- Finally, many organizations struggle with a lack of analytics and monitoring. Without tracking chronic underpaid claims, analyzing patterns, or generating robust denial and underpayment reports, practices cannot spot recurring issues and recover lost revenue.
These RCM-related gaps create avoidable revenue leakage and highlight the importance of accurate coding, clean claim submission, diligent reconciliation, and strong analytical oversight.
- Administrative Errors
Eligibility and benefit verification failures are a major source of underpayments in medical billing. When patient coverage is not verified upfront, practices may submit claims with incorrect insurance information, leading to reduced payments or denials. Wrong plan details—such as outdated coverage, incorrect payer IDs, or missed benefit limitations—cause payers to process claims under the wrong policy or apply the wrong reimbursement rules. Additionally, if providers do not submit prior authorization for services that require approval, it leads to partial payments or complete nonpayment.
Another issue is the lack of proper documentation. When provider documentation is incomplete, inconsistent, or unclear, coders cannot assign accurate codes or justify medical necessity, resulting in reduced reimbursement and avoidable underpayments.
How to Prevent Underpayments in Healthcare
Preventing underpayments requires a proactive approach that combines accurate documentation, careful contract management, and smart use of technology. Implementing the following strategies can go a long way in resolving insurance underpayments:
- Regular Contract Review and Fee Schedule Updates
Maintaining up-to-date payer contracts and fee schedules is essential. Outdated rates or missed amendments often lead to underpayments. By regularly reviewing contracts, mapping negotiated rates to billing systems, and updating fee schedules, providers can ensure claims are reimbursed accurately and according to agreed terms.
- Strengthen Coding and Documentation Practices
Accurate coding and thorough documentation are critical to capturing the full value of services provided. Conducting periodic coding audits, training staff on proper CPT and ICD-10 coding, and ensuring medical necessity is clearly documented help prevent claims from being underpaid due to coding errors or insufficient documentation.
- Improve Insurance Verification Processes
Many underpayments occur because patient eligibility and benefits are not verified before services are rendered. Implementing real-time eligibility checks, confirming coverage details, and managing prior authorizations ensure claims are submitted with correct plan information, reducing denials and underpayments.
- Implement Robust Payment Posting & Reconciliation
Accurate payment posting and regular reconciliation help identify discrepancies between payments received and contracted rates. Automated ERA/EOB posting, frequent comparison with contracts, and prompt resolution of discrepancies prevent small underpayments from accumulating into significant revenue loss.
- Use Analytics to Identify Trends
Leveraging RCM analytics allows practices to track underpaid claims, monitor denial patterns, and identify chronic issues. By analyzing trends, organizations can address systemic problems, improve claim accuracy, and recover missed revenue proactively.
- Leverage Technology and AI to Reduce Errors
Advanced technology, including AI-driven coding tools, automated claim scrubbing, and predictive analytics, can significantly reduce human errors. These tools help coders validate charts, catch missing modifiers, and flag potential underpayments before claims are submitted, ensuring cleaner claims and faster, more accurate reimbursement.
Controlling and Preventing Underpayments: The Path Forward
Identifying underpayments is the first step; using those insights to prevent future losses is the next. Effective management of underpaid claims requires a clear understanding of revenue cycle processes – from registration to final payment. By partnering with a healthcare revenue cycle management (RCM) company, practices can analyze data to uncover payer patterns, track claim lifecycles, and implement targeted strategies to recover lost revenue.
Beyond proactive healthcare receivables management, refining contract management and increasing payer accountability not only recovers missed payments but also strengthens future negotiations. With strategic alignment and data-driven insights, healthcare organizations can minimize underpayments, optimize revenue, and achieve sustained financial stability.
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