- Underpayments are paid claims that fall short of contracted rates — and they’re easy to miss
- Common causes include fee schedule errors, modifier reductions, and bundling issues
- Catch them by comparing remittance data against contracts and auditing high-volume codes
- Escalate recurring issues with documentation, and know when to bring in legal
Let’s face it. Mistakes happen. No payer or provider is perfect, and claim submission and payment errors occur. However, when payers repeatedly underpay claims, there’s a direct, negative impact on practice finances. Practices are rightfully entitled to every dollar.
Consider a primary care practice that reviews claims with CPT code 99214 and discovers that one payer is reimbursing $6 less than the contracted rate. The practice bills 8,000 of these visits annually. The financial impact is immediate::
- Underpayment (lost revenue) per claim: $6
- Annual volume: 8,000 claims
- Potential net revenue leakage: $48,000 per year
Hospitals absorbed $130 billion in underpayments from Medicare and Medicaid in 2023 alone.
Systemic problems may go undetected unless providers have a way to identify underpayments and safeguard revenue integrity.
What are systemic payer underpayments?
Underpayments in healthcare occur when payers fail to reimburse claims accurately based on negotiated contracts, fee schedules, or regulatory requirements, resulting in less pay than a physician expects.
How underpayments differ from claim denials
A claim denial results in nonpayment of a claim, whereas an underpayment occurs when a payer processes and pays the claim but reimburses less than the amount it contractually or legally owed. Consider the following comparison between underpayments and claim denials:
| Underpayment | Claim denial |
|---|---|
| The payer pays the claim but pays less than the amount owed. | The payer refuses to pay all or part of the claim. |
| Some reimbursement is received. | No reimbursement is received (or a portion is denied). |
| Often caused by contract discrepancies, payment calculation errors, bundling issues, or incorrect fee schedules. | Often caused by eligibility issues, prior authorization failures, coding errors, medical necessity concerns, or missing documentation. |
| Can be difficult to detect because the claim appears paid. | Usually easier to identify because the payer explicitly communicates the denial. |
| Results in revenue leakage that may go unnoticed without payment variance analysis. | Creates an immediate accounts receivable and appeals workload. |
How underpayments hide revenue leakage
Underpayments create hidden revenue leakage because claims are technically paid. However, unless a provider works proactively to identify underpayments, they won’t realize there’s a financial shortfall. Without a targeted audit to identify underpayments, that discrepancy might go unnoticed because all claims were technically paid.
The most common signs of systemic underpayments
Isolated payment errors don’t usually signal systemic problems. Instead, the strongest indicator of a systemic underpayment is a recurring payment variance affecting the same payer, service, contract provision, or claim type across a large volume of claims.
Payment variances below contracted rates
The biggest sign of a problem is when a payer reimburses below contracted rates on a regular basis. However, without regular auditing to identify underpayments, these discrepancies can persist for months or years before providers discover them. Common causes of payment variances include the following:
- Failure to apply annual contractually required rate increases
- Incorrect application of multiple procedure reductions or bundling edits
- Incorrect fee schedule implementation by the payer
- Misinterpretation of a contract term
- Modifier-related payment errors
- System configuration issues following payer software updates or contract renewals
Recurring underpayments tied to CPT codes or modifiers
When providers start to monitor payments more closely, they may notice a trend in payers routinely reimbursing CPT codes for certain services below the expected contracted amounts. Payment variances may occur most frequently in high-volume, high-complexity services following contract updates, fee schedule changes, or payer system modifications. Examples of CPT codes that payers frequently underpay include:
- Evaluation and management (E/M) visits
- Imaging
- Infusion therapy
- Laboratory testing
- Surgery
Modifiers can also cause underpayments when payers incorrectly reduce, bundle, or deny reimbursement. Underpayments frequently occur with these modifiers:
- Modifier -25 (Significant, separately identifiable E/M service): The payer reduces or denies the E/M service even though it was appropriately provided in addition to a procedure.
- Modifier -26 (Professional component): The physician interpretation is reimbursed at a lower rate than contractually required.
- Modifier -59 (Distinct procedural service): Services that should be paid separately are incorrectly bundled together.
- Modifier -TC (Technical component): The technical portion of a diagnostic service is paid incorrectly or not recognized.
- Modifiers -51 and -50: Multiple procedure or bilateral procedure reductions are applied incorrectly or more aggressively than allowed by the contract.
Increasing write-offs despite stable denial rates
Providers may also notice an increase in write-offs even when denial rates remain on track. That’s because underpayments don’t appear as denials — they appear as paid claims. Underpayments for all codes may be more likely to occur after the following events, but they can technically occur at any time:
- Claims system conversions
- Contract renewals
- Medicare fee schedule updates
- Payer acquisitions
Proactive monitoring to identify underpayments prevents revenue loss.
How healthcare practices identify underpaid claims
Healthcare practices can identify underpayments by comparing actual reimbursement against expected reimbursement based on payer contracts, fee schedules, and payment policies. Here’s a holistic approach to consider:
Compare payments against payer contracts and fee schedules
Calculate expected reimbursement based on contract terms and compare actual versus expected payment to identify variances. Review the following remittance data to identify underpayments:
- Claims paid below contract rates
- Incorrect application of multiple procedure reductions
- Missing payments for separately billable services
- Unexpected reductions
Even small differences can become significant when multiplied across claim volume.
Audit high-volume services rendered
High-volume services often reveal systemic underpayments faster than random claim reviews because recurring payer errors become easier to spot when they affect hundreds or thousands of claims. Be sure to focus on:
- High-dollar services
- High-volume codes with recurring variances
- Payers responsible for the greatest revenue impact
Track underpayment trend by payer
Create payer-specific reports showing:
- Appeals and recovery outcomes
- Modifier-related discrepancies
- Most common adjustment codes
- Most frequently affected CPT codes
- Total dollars underpaid
- Underpayment rate
Be sure to break down underpayments by:
- CPT code
- Location
- Provider
- Service line
- Specialty
How to escalate systemic underpayments by payer
After identifying systemic underpayments, the next step is to notify the payer and collaborate to resolve the issue.
Gather payment variance documentation
First, collect documentation that quantifies the problem and identifies the root cause. Here’s what to include:
| Step | What to review | Examples |
|---|---|---|
| 1. Quantify the problem | Gather data that demonstrates a recurring reimbursement issue rather than isolated claim errors. | • Number of affected claims • Total underpaid dollars • Time period affected • Specific CPT/HCPCS codes involved • Impacted modifiers (e.g., -25, -59, -26, -TC) • Contract provisions supporting the expected reimbursement |
| Why it matters | Payers are more likely to investigate and correct systemic issues when providers can demonstrate a measurable pattern and financial impact. | Example: 1,200 claims underpaid by a total of $75,000 over six months. |
| 2. Identify the root cause | Determine the underlying reason for the payment variance before escalating the issue. | •Incorrect fee schedule loading • Contract interpretation discrepancies • Modifier payment logic errors • Bundling or editing issues• Improper multiple procedure reductions • Medicare percentage calculation errors |
| Why it matters | A clearly defined root cause helps the payer investigate more efficiently and increases the likelihood of a timely resolution. | Example: A payer failed to update its system with a contracted rate increase that took effect January 1, resulting in six months of underpayments. |
Escalate recurring issues through payer representatives
Engage the payer's network management or contracting team. Maintain documentation of:
- Case numbers
- Emails
- Meetings
- Payer commitments
- Recovery amounts
This creates an audit trail if further escalation becomes necessary. Note that the American Medical Association provides a whole host of resources — including letters to payers regarding underpayments — that can help.
Know when contract management or legal review is necessary
Contract management review is typically appropriate when:
- The issue involves contract implementation rather than claim submission.
- You are assessing whether the payer is complying with negotiated terms.
- You are preparing documentation to support payer escalation.
- You need to verify fee schedules and reimbursement formulas.
Legal review is typically appropriate when:
- Contract language is ambiguous or disputed.
- Formal dispute resolution, arbitration, or litigation may be required.
- Significant revenue recovery is involved.
- State prompt-pay laws or contractual obligations may have been violated.
- The payer refuses to correct a documented systemic issue.
Best practices for underpayment recovery and prevention
Successful underpayment recovery and prevention depend on proactively monitoring payment variances, auditing high-risk services and payers, maintaining accurate contract data, and addressing systemic reimbursement issues before they result in significant revenue leakage. Consider the following strategies for recovering underpayments most effectively:
Automate reimbursement monitoring
Use technology to compare expected reimbursement against actual reimbursement. Then flag discrepancies before they become significant revenue leakage. Automated contract management software calculates expected reimbursement based on payer contracts and compares it to actual payments received.
Review payer contracts and fee schedules regularly
Most organizations review payer contracts and fee schedules at least annually, and nearly half (48%) of medical groups say they audit payer payments at least quarterly. Don't wait for the annual review if any of the following occur:
- Contract renewal or amendment
- Increase in payment variances
- Medicare fee schedule updates
- New service lines or CPT codes
- Payer merger, acquisition, or system conversion
- Significant changes in payer policies
- Unexpected reimbursement declines
Improve revenue cycle visibility across billing workflows
Provide revenue cycle leaders with a clear view of financial performance from patient access through final payment. The goal is to identify bottlenecks, denials, underpayments, and reimbursement risks before they affect cash flow. Following are some key strategies to consider when trying to identify underpayments:
| Strategy | How it improves visibility |
|---|---|
| Create end-to-end revenue cycle dashboards | Provides a single view of performance across scheduling, registration, medical billing and coding, claims, denials, payments, and collections. |
| Standardize KPIs across departments | Ensures patient access, coding, billing, denials, and collections teams are measuring performance consistently. |
| Track claims throughout the revenue cycle | Enables organizations to monitor claims from submission through adjudication, appeals, payment, and patient collections. |
| Implement payer performance reporting | Highlights trends in revenue cycle management denials, underpayments, turnaround times, appeal outcomes, and payment accuracy by payer. |
| Monitor payment variances and underpayments | Identifies revenue leakage that may not appear in denial reports. |
| Integrate financial and clinical systems | Connects EHR software, practice management, contract management, and billing data to reduce information silos. |
| Use real-time analytics and alerts | Notifies staff when denial rates, payment variances, or A/R metrics exceed established thresholds. |
| Analyze root causes across workflows | Links front-end issues such as eligibility errors and authorization gaps to downstream denials and reimbursement delays. |
| Establish regular cross-functional reviews | Brings together patient access, coding, contracting, billing, and finance teams to review trends and resolve issues. |
| Develop payer scorecards | Creates transparency around payer performance and operational risk. |
FAQ about payer underpayments
- Incorrect fee schedule loading
- Failure to implement contract amendments
- Bundling and editing issues
- Multiple procedure reduction errors
- Medicare-based reimbursement calculation errors
- System conversions or software updates
- Value-based payment calculation issues
- Prior authorization-related payment reductions
- New CPT/HCPCS code implementation issues
- Coding inaccuracies
- Insufficient or incomplete documentation
- Claim submission errors
- Eligibility or coverage verification failures
- Failure to obtain required authorization
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