When a medical claim is denied, the problem is usually obvious. The practice receives an explanation of benefits, sees that payment was not issued, and has an opportunity to investigate what went wrong.
Underpayments are different.
A claim may appear to be successfully processed because the insurance company issued a payment. However, the amount received may be lower than the reimbursement the provider was contractually entitled to receive. When these discrepancies go unnoticed, they can quietly reduce practice revenue month after month.
For busy healthcare practices, identifying every underpaid claim may seem difficult. There are patients to care for, claims to submit, denials to appeal, and administrative responsibilities competing for staff attention. Still, understanding how underpayments happen and establishing a process to detect them can make a meaningful difference to the financial health of a practice.
What Is an Underpayment in Medical Billing?
A medical billing underpayment occurs when an insurance payer reimburses a healthcare provider for less than the amount that should have been paid according to the applicable reimbursement terms.
For example, imagine that a provider’s contracted reimbursement for a particular service is $125. The payer processes the claim and sends a payment of $90.
The claim was not denied. The practice received money. Yet there may still be $35 in revenue that needs to be investigated.
Sometimes the lower payment is legitimate because of deductibles, coinsurance, non-covered services, contractual adjustments, or other patient-specific factors. In other situations, the payer may have processed the claim incorrectly.
The challenge is determining which is which.
Why Underpayments Are Easy to Miss
Medical practices often devote significant attention to unpaid claims. That makes sense because a completely unpaid claim is immediately visible on an accounts receivable report.
An underpayment can be much harder to recognize.
A payment posts to the patient’s account. The claim may move out of an active follow-up queue. The balance may be adjusted automatically. Unless someone compares the payment against the expected reimbursement, the discrepancy can remain hidden.
One small difference may not appear significant.
But consider what happens when similar discrepancies occur across hundreds or thousands of claims.
A $10 or $20 difference on an individual claim can become thousands of dollars in missed revenue over the course of a year.
Common Reasons Medical Claims Are Underpaid
There is no single explanation for every underpayment. Practices should investigate the details surrounding each discrepancy.
1. Incorrect Payer Processing
Insurance companies process enormous volumes of claims. Errors can occur during adjudication, including incorrect application of reimbursement rules or benefits.
If the payment does not match the expected amount, the practice may need to contact the payer or submit an appeal.
2. Incorrect Contractual Adjustments
Contractual adjustments should reflect the terms of the provider’s agreement with the payer.
If an adjustment is larger than it should be, the practice could effectively be writing off money it was entitled to collect.
3. Incorrect Fee Schedule Application
Different insurance contracts can have different reimbursement rates for the same service.
If the wrong fee schedule or reimbursement rate is applied, payments may consistently come in below expectations.
4. Bundling and Coding Issues
Certain services may be bundled according to payer policies or coding rules. However, incorrect bundling can sometimes result in a lower payment than expected.
Practices need to determine whether the reduction is appropriate or whether additional reimbursement should be requested.
5. Changes to Payer Contracts
Insurance contracts and reimbursement arrangements can change.
If a practice’s billing system, fee schedule, or internal reference information is not updated accordingly, staff may have difficulty determining whether payments are accurate.
6. Patient Responsibility
Not every difference between the billed amount and insurance payment represents an underpayment.
A portion of the allowed amount may legitimately be assigned to the patient’s deductible, copayment, or coinsurance.
This is why underpayment analysis requires more than simply comparing the billed charge with the insurance check.
The Difference Between an Underpayment and a Denial
A denial generally means the payer did not issue payment for a claim or service.
An underpayment means the payer issued payment, but the amount may not match the expected reimbursement.
These situations require different approaches.
Denial management often focuses on identifying the reason for nonpayment and correcting or appealing the claim.
Underpayment recovery requires practices to determine what should have been paid, compare that amount with what was actually received, and identify the reason for the difference.
Both processes matter, but they should not be treated as the same problem.
How Practices Can Detect Underpayments
A consistent payment variance process can help practices identify potential revenue that would otherwise be overlooked.
Start With Expected Reimbursement
The practice needs a reliable way to determine what a payer should have paid for a particular service.
This may involve reviewing:
- Payer contracts
- Fee schedules
- Allowed amounts
- Procedure codes
- Modifiers
- Provider participation agreements
- Patient benefit information
- Contractual adjustment rules
Without an accurate expected reimbursement amount, it is difficult to determine whether a payment is actually incorrect.
Compare Expected Payments With Actual Payments
Once the expected amount is established, practices can compare it with the payment received.
A meaningful difference should trigger an investigation.
For larger practices, automated systems and billing technology can make this process more manageable by identifying payment variances across large claim volumes.
Look for Patterns
One underpayment may be an isolated issue.
Repeated underpayments from the same payer, procedure, location, or provider may indicate a larger problem.
For example, if a practice consistently receives less than its contracted rate for a particular procedure, the issue may deserve immediate attention.
Pattern recognition can help practices move beyond individual claim follow-up and identify systemic problems.
What Should a Practice Do When It Finds an Underpayment?
Finding a discrepancy is only the beginning.
The next step is determining why the payment was lower than expected.
The billing team should review the explanation of benefits or electronic remittance information and compare the payer’s calculations against the applicable reimbursement terms.
If the payment is correct, the account can be appropriately documented and closed.
If the payment appears incorrect, the practice may need to contact the payer, request clarification, submit supporting documentation, or file an appeal depending on the circumstances.
Documentation is especially important.
Keeping records of payment discrepancies, payer responses, contract terms, and appeal outcomes can help the practice identify recurring issues and strengthen future follow-up.
Why Payment Variance Analysis Matters
Payment variance analysis can reveal problems that traditional accounts receivable reports may not show.
A practice could have relatively low outstanding accounts receivable while still losing revenue through systematic underpayments.
This is why financial performance should not be evaluated solely by looking at how much money remains unpaid.
Practices should also consider whether the money they receive is the amount they were supposed to receive.
That distinction can have a significant impact on long-term revenue.
How Technology Can Help
Manually reviewing every payment can be difficult, particularly for practices handling large claim volumes.
Modern medical billing technology can help identify unusual payment patterns, compare expected and actual reimbursement, organize payer information, and prioritize accounts requiring human review.
However, technology works best when it is supported by accurate data and knowledgeable billing professionals.
A system cannot reliably determine whether a payment is incorrect if the expected reimbursement information is outdated or inaccurate.
The combination of technology, accurate payer information, and experienced billing oversight provides a stronger approach to payment integrity.
When Underpayments Become a Bigger Business Problem
Repeated underpayments should not always be treated as isolated billing issues.
They can point to broader operational concerns.
For example, a practice may need to review whether:
- Payer contracts are being maintained accurately
- Fee schedules are up to date
- Payment posting procedures are consistent
- Staff understand payer-specific reimbursement rules
- Billing software contains current information
- Payment discrepancies are being escalated appropriately
- Recurring payer issues are being tracked
Addressing these areas can help practices recover revenue while also reducing the chance that similar problems continue.
How Billing Nerds Can Help
Identifying underpayments requires time, accurate information, and consistent follow-through.
Billing Nerds helps healthcare practices take a closer look at the financial side of their billing operations. Through medical billing, documentation review, business consulting, and related services, our team can help practices identify opportunities to improve their revenue processes and manage billing responsibilities more effectively.
For practices that suspect they are receiving less reimbursement than expected, a closer review of payment patterns may reveal opportunities that are not obvious from standard billing reports.
Recovering revenue is not always about submitting more claims. Sometimes, it is about making sure the claims that have already been paid were paid correctly.
Conclusions
Medical billing revenue can be lost in more ways than a denied claim.
Underpayments can quietly reduce reimbursement while creating the appearance that everything is functioning normally. The practice submits the claim, receives a payment, posts the transaction, and moves forward.
Without payment variance analysis, however, an incorrect payment may never receive a second look.
A proactive approach allows healthcare practices to compare expected reimbursement with actual payments, recognize recurring discrepancies, investigate questionable transactions, and take appropriate action when money is left on the table.
For growing medical practices, protecting revenue means looking beyond whether a claim was paid. It also means asking whether it was paid correctly.
Author: Rhonda Scantlebury