How To Identify, Recover + Resolve Underpayments in Healthcare

Featuring: Lane Rosenthal | SVP, Revenue Integrity

As hospitals continue to face unprecedented levels of financial pressure, leaving money on the table isn’t an option. Yet too many hospitals continue to lose anywhere from 1% to 10% of net revenue on underpaid claims each year – money they are contractually owed. Below, we’ll cover how to identify underpayments in healthcare so your organization can recover and resolve these monetary issues.

What are Underpayments?

An underpayment is just what it sounds like – a partial payment. Underpayments occur for healthcare providers when payors don’t reimburse the full amount owed for services rendered to their beneficiaries and when providers don’t fully bill for the care delivered.

Common Issues Causing Underpayments

The common causes of underpayments fall into two categories: payor-related issues and revenue cycle management-related issues.

Payor-related causes for underpayments include:

  • Contractual underpayments, where the payor doesn’t fully pay per the terms outlined in their contract, especially related to complex terms like high-dollar stop-loss, carve outs, escalators and lessor-of language
  • Processing errors, where the payor makes mistakes calculating the owed amount or processing the claim for payment

Preventable revenue cycle causes for underpayments include:

  • Charge capture-related issues including CDM inaccuracy, charges related to lessor-of language and pharmacy multiplier errors
  • Coding-related issues including inappropriate coding of DRGs, missing diagnosis, inaccurate procedure order and transfer DRG errors
  • Medical billing-related issues including alternate revenue code logic, payor-specific edits and appropriate capture of specialty payments like IMEs (indirect medical education payments)

How to Identify Underpayments

A payment variance report is a standard report produced by an electronic health record or provider’s host system that shows discrepancies between estimated and received payments. This report typically feeds the work queue of underpayments for review and resolution.

What the Payment Variance Report Can Tell You

Two important things to note about the standard variance report are that it’s only as good as the information put into it, and there’s a lot of noise that doesn’t add much value.
What you can see on a payment variance report:

  • Payment variances
  • Stoploss
  • Carveouts
  • Annual escalators
  • Processing errors
  • Bundling issues

Unfortunately, you can also see a lot of false variances related to:

  • Contract load issues
  • Registration issues
  • Late charges
  • Posting errors
  • Denials

What the Payment Variance Report Can’t Tell You

Contract management systems, which house payor contracts, will price exactly what you put into them. Basically, you get what you built and billed.

The variance report is a logical first step but provides only surface-level insights. A holistic strategy goes well beyond the variance report and takes a critical look at your revenue cycle processes. The value chain of every step in the billing process from registration to working edits is only as good as its weakest link (and you will find multiple weak links).

What you can’t see on a payment variance report:

  • Missing charges
  • Implant and supply definition errors
  • Pharmacy multipliers
  • New/deleted codes
  • Missing diagnosis
  • Inaccurate procedure order
  • Transfer errors
  • Modifiers
  • Revenue code alternate logic
  • Payor-specific edits

3 Steps to Successful Underpayment Recovery

The goal of any underpayment recovery program is to identify and resolve issues preventing your organization from being paid optimally and compliantly per your established contracts. Managing underpaid claims requires analysis and understanding of revenue cycle processes and how they impact reimbursement from registration to final payment.

Follow these three steps for successful underpayment recovery:

1. Identify: Gain a True Picture of Recovery Opportunities

  • Leverage seasoned experts who understand reimbursement to create necessary rules. It’s important to invest in a good team who is talented and knowledgeable.
  • Start (but don’t end with) the variance report, eliminate false variances and build your “black book” of rule sets and queries.
  • Use machine learning technology to support workflow and anomaly detection, harnessing the power of underpayment experts and their critical thinking capability.
  • Deploy dedicated analysts to thoroughly review all revenue issues.

2. Recover: Prioritize, Escalate + Act

  • Dedicate resources to specifically collect on underpaid accounts.
  • Group and prioritize accounts to streamline efforts. Automate appeals to expedite recovery workflow.
  • Identify and escalate payor issues automatically.

3. Resolve: Focus on Prevention

  • Analyze root cause reporting and trending to learn from issues and improve processes to prevent future underpayments.
  • Provide direct feedback to revenue cycle teams to fix errors where they are happening.
  • Partner with managed care teams, share trending reports and review opportunities and escalations to help with future contract negotiations.

What’s the Impact?

Revenue cycle-related issues have big impacts to your bottom line. In 2022, Ensemble recovered more than $200 million in underpayments for clients, of which 70% were identified beyond the variance report.

Go Beyond the Variance Report to Yield Substantial Gains in Revenue

In one example, we recovered more than $55 million in underpayments from alternate revenue code logic issues at one hospital alone. 

What we discovered:

  • They were using revenue code 250, a standard pharmacy code, to represent a high-cost drug to insurance carriers. While not inaccurate, it wasn’t as specific as it could be.
  • Revenue code 636 was more appropriate and was reimbursed at 60% of charges by one payor, compared to $0 for revenue code 250.
  • This contract term nuance equated to a $30,000 difference in reimbursement on a single claim.

A discrepancy like this is often overlooked because it is not technically an error and is not visible on a variance report. If left unidentified and unaddressed, this single instance of oversight would have continued to cause tens of millions of dollars in missed revenue for this hospital each year.

Key Takeaways

A Holistic Approach to Your Underpayment Strategy = More Revenue Recovered

Hospitals and healthcare providers will continue leaving money on the table if they aren’t thinking holistically about identifying, recovering and resolving underpayments. The amount of net revenue lost to underpayments varies by provider based on its complexity of payor contracts, efficacy of underpayment management efforts and health of revenue cycle operations. Thinking beyond payment variances will help ensure costly underpayments are identified and resolved to prevent future missed revenue.

Learn more about how to establish a successful underpayment program with this on-demand webinar hosted by Becker’s Healthcare and Ensemble Health Partners.


Lane Rosenthal has more than 20 years of experience specializing in managed care financial analysis, hospital contract management and underpayment recovery strategy. Lane serves as the senior vice president of revenue recovery for Ensemble Health Partners where he leads a team of more than 200 certified revenue cycle operators focused on effectively identifying, recovering and resolving underpayments for hospitals, health systems and affiliated physician groups across the country.

These materials are for general informational purposes only. These materials do not, and are not intended to, constitute legal or compliance advice, and you should not act or refrain from acting based on any information provided in these materials. Neither Ensemble Health Partners, nor any of its employees, are your lawyers. Please consult with your own legal counsel or compliance professional regarding specific legal or compliance questions you have.