A medical practice’s financial stability depends on accurate and immediate reimbursement.

Your practice may be at sixes and sevens when the payer underpays the medical claims.

You may not have paid enough for the medical treatments or services as stipulated in the contract with your payer.

This can be an alarming situation for a medical practice. Underpayments hurt the practice’s bottom line.

You must take immediate steps to overcome this issue and reduce the revenue loss.

In this blog post, you will learn how to reduce medical billing underpayments. Addressing these issues helps maximize reimbursements. Finally, this helps you skyrocket your practice’s revenue collection.

What are Underpayments?

Every medical practice must understand the concept of underpayments, underpaid claims, and denied claims.

Let’s see what the underpayments are:

When a medical practice gets paid partially or less than what the health insurance company is to pay according to a signed contract, this is known as underpayment in medical billing.

Both providers and insurance companies are responsible for underpayments.

Underpayments occur when a biller enters incorrect pricing values for the rendered services in the claim form.

That’s why the payer pays less than the amount according to the contract according to pricing details, which is incorrect.

According to the American Hospital Association (AHA): ▶ Combined underpayments were $100.4 billion in 2020, up from $75.8 billion in 2019. ▶ The 2020 underpayment includes a shortfall of $75.6 billion for Medicare and $24.8 billion for Medicaid. ▶ For Medicare, hospitals received payments of only 84 cents for every dollar spent by hospitals caring for Medicare patients in 2020. ▶ For Medicaid, hospitals received payments of only 88 cents for every dollar spent by hospitals caring for Medicaid patients in 2020. ▶ In 2020, 67 percent of hospitals received Medicare payments less than cost, while 62 percent of hospitals received Medicaid payments less than cost.

On the other hand, when an insurer prepares a consent document for a contract that is not simple, clear, or difficult to understand for providers, the contract may be misinterpreted, leading to underpaying the provider.

Here’s a comparison table for underpaid claims and denied claims:

Aspect	Underpaid Claim	Denied Claim
Definition	A claim where the payment received is less than the amount billed.	A claim that is rejected by the insurance company, resulting in no payment.
Common Reasons	Coding errors, contract underpayments, missed charges, bundling issues.	Lack of medical necessity, missing information, coverage issues, and pre-authorization not obtained.
Resolution Steps	· Review the Explanation of Benefits (EOB). · Identify discrepancies. · Submit an appeal with supporting documentation.	· Review the EOB or denial letter. · Correct and resubmit the claim. · Provide additional information or documentation.
Impact on the Provider	Financial loss due to receiving less payment than expected.	Complete loss of payment for the services rendered.
Patient Involvement	Patients may receive a bill for the unpaid balance.	Patients may be contacted for additional information or payment.
Time to resolve	It can vary but is often quicker as it involves correcting payment amounts.	Typically longer, especially if extensive documentation or appeals are needed.
Documentation Required	Itemized bill, medical records, coding references, and contract terms.	Medical records, authorization documentation, a corrected claim form, and an appeal letter.
Insurance Company’s Role	Adjust payment upon receiving the correct information or appeal.	Reevaluate the claim upon receiving the corrected or additional information.
Common in Specialties	Often seen in specialties with complex billing codes, such as surgery, radiology, and orthopedics.	Common in all specialties, particularly where pre-authorization is critical, such as in mental health, physical therapy, and specialty medications.
Preventative Measures	Regular training on coding, accurate billing practices, and contract reviews.	Ensure complete and accurate documentation, obtain pre-authorizations, and verify patient coverage beforehand.

Major Reasons for Underpayments

According to an estimate, when insurers pay less than the rate specified in a contract, it hurts revenue without physicians even realizing it. As much as 3% of a typical practice’s expected revenue is lost to underpayments.

Before moving ahead to learn how to minimize underpayments, let’s explore the major reasons that cause claims to be underpaid.

Incorrect Codes or Documentation by Provider

Medical services and procedures are billed using specific codes (e.g., CPT, ICD-10). If a provider uses the wrong code, it may result in lower reimbursement or denial of the claim. For example, if a higher-paying procedure is coded as a lower-paying one, the payment will be less than expected.

Proper documentation is essential to justify the services billed. If the clinical notes do not support the billed services, payers may reduce payment or deny the claim. This includes not documenting the medical necessity for certain treatments or missing critical information.

Example: A doctor performs a complex surgery but uses a code for a simpler procedure. The insurance company reimburses for the simpler procedure, resulting in an underpayment.

Incorrect Contract Terms by the Insurer

Healthcare providers and payers (insurance companies) have contracts that specify the payment rates for various services. If the payer uses incorrect terms in these contracts, the reimbursement may not match what was agreed upon.

Sometimes, errors in the payer’s system can lead to the use of outdated or incorrect contract rates.

Example: A hospital has a contract that specifies a payment of $1,000 for a particular surgery, but the payer mistakenly uses an old rate of $800. The hospital receives $800 instead of the agreed-upon $1,000.

Incorrect Allowed Amount Calculated by Payer

The allowed amount is the maximum amount a payer will reimburse for a service. If this is calculated incorrectly, it can lead to an underpayment.

Mistakes can happen in the complex calculations involved in determining allowed amounts, which may include deductibles, co-pays, and co-insurance.

Example: An insurance plan states that the allowed amount for a specific test is $200, but due to a calculation error, the payer only allows $150. The provider is underpaid by $50.

Differently Interpreted Contract Terms

Contracts between payers and providers may have ambiguous terms that can be interpreted differently by each party. This can lead to disputes over the correct payment amount.

Providers may bill for services they believe are covered under the contract, while the payer may interpret the terms differently and deny or reduce payment for those services.

Example: A contract states that certain ancillary services are covered but does not specify which ones clearly. The provider bills for an ancillary service, believing it is covered, but the payer disagrees and does not reimburse for that service.

Identify Underpayments with Payment Variance Report

The Payment Variance Report is a detailed analysis and comparison of the expected payment amounts based on contracted rates with the actual payments received from payers. It is a standard usually used in revenue cycle management (RCM).

An electronic health record that shows discrepancies between estimated and received payments produces the payment variance report. This report typically feeds the work queue of underpayments for review and resolution.

How to Reduce Underpayments?

It is crucial for every medical facility to keep an eye on underpaid claims during payment collection from the insurance provider.

If a medical practice has a lot of underpaid claims and your revenue is stuck, So you must go with these strategies to reduce underpayments.

Here are some effective ways that providers can utilize to reduce underpayments and get fully reimbursed for the services they offer.

Use Correct Codes and Accurate Documentation

Make sure to use the correct medical codes for procedures and diagnoses. Proper coding is essential for insurers to understand what services were provided. Accurate documentation supports these codes, showing that the treatments were necessary and appropriately delivered.

• Double-check the codes before submission.
• Train staff regularly on coding updates.
• Maintain thorough and precise patient records.

Read and Understand Contract Terms with the Payer

Every insurance payer has specific contract terms detailing what they will and will not cover, as well as payment rates. Understanding these terms helps you avoid surprises and ensures you bill correctly according to the contract.

• Review payer contracts carefully.
• Highlight key terms related to payment and coverage.
• Contact payers for clarifications if needed.

Calculate Amounts Correctly to Avoid Mistakes

Ensure that the amounts billed to the payer are calculated correctly. Errors in billing amounts can lead to underpayments or claim denials.

• Use accurate fee schedules.
• Verify that the calculations are correct before submitting claims.
• Utilize tools or software to check for common billing errors.

Appeal Underpaid Claims and Submit Timely

If a claim is underpaid, you have the right to appeal. Doing this promptly increases the chances of getting the correct payment.

• Monitor payments to identify underpayments.
• Prepare documentation and evidence to support your appeal.
• Submit appeals within the time limits set by the payer.

Utilize Practice Management Software (PMS)

Practice Management Software helps streamline billing processes, track claims, and manage patient information efficiently. Using PMS can reduce errors and improve the likelihood of correct and timely payments.

• Implement a robust PMS to automate underpayment detection.
• Train staff on how to use the software effectively to detect the underpaid claims.
• Regularly update the software to incorporate the latest features and coding updates.

Final Thoughts

Identifying and addressing the causes of underpayments, medical practices can significantly improve their revenue collection. Utilizing correct codes, understanding contract terms, calculating amounts accurately, appealing underpaid claims promptly, and leveraging Practice Management Software are essential steps. Implementing these strategies not only minimizes revenue loss but also enhances the overall financial health of the practice, ensuring sustainable growth and stability.