Underpayments and Chronic Undercharging

The underpayment and undercharging baseline for 6,000,000 claims a year range from ½% to 2%. Reviewing all the claim transactions for recouping or process improvements would take 7,500 hours for ~3.61 staff (1/2%) to upwards of 30,000 hours for ~14.42 staff (2%). This document will serve as a guide to improving your facility’s financial stability during a pandemic through recognizing underpayments and undercharges, understanding the susceptibility of your facility, and recovering from these financial leakages.

In-Depth Assessment of Underpayments and Undercharges: What Are They, and Why Do They Happen?


  • Allowance variance– a case where the service-level allowable is lower than what should be allowed based on the terms of your contract with a payer. Not all allowance variances are underpayments. For example, most cases where services are allowed to be less than the contracted rate are not
  • Payer reimbursement rules often dictate how a service is paid. They can be documented separately from your contract terms and updated more frequently than (and outside the run dates of) your contracts.
  • Payments from payers are notorious for being less than the allowed amount. Increases in HDHPs in the insurance market have made this increasingly common. More plans are also assigning patient cost chares beyond the deductible, as a higher number of plans have coinsurance, and copays are being applied to more services than physician, ED, and hospitalizations.


  • An undercharge is self-inflicted financial leakage, but the silver lining is that this can be fixed with internal infrastructure change(s). Nearly every contract with a commercial payer will have a single sentence clause worded similarly to: “Payer agrees to reimburse provider the lesser of billed charges or the rates put forth in this contract.” This means that, as a provider, if you are not aware of your highest contracted rates, there is a chance that you are charging less than what you are contracted to collect. The payer will happily pay you less.
  • Why do they happen? – Contracted rate changes happen more often than you probably think, and organizations sync their fee schedules with the new fiscal/calendar year. Therefore, if the contracted rate changes occur more often than annually, you are potentially undercharging some services a quarter-way or halfway through your fiscal year.
  • It is critical to catch these early if possible. When a provider is underpaid due to payer error, the provider has several alternatives: bulk reprocessing of claims, an agreement to a settlement so no claims are reprocessed, or individually appealing claims. These financial leakages are revenue that cannot be recovered.

Common Allowance Reductions

Examples of Reductions Implemented Outside the Contract:

  • Services Rendered and Billed by APPs: some payers allow at the 100% of the contract allowed amount, some commercial payers will follow Medicare practices and pay certain services at 85% of the contracted allowance, and other payers will pay a reduced amount that is not based on Medicare (~75%)
  • Surgery Assist Discounts: Services could potentially be allowed at 14%, 15%, or some other significantly reduced percentage of the “normal” allowed
  • Multiple Procedure Discounts: Reduction percentages vary by the payer, with some following Medicare practices and others not following them

The Real Underpayments—Root Cause

There are several prevalent potential root causes for chronic underpayments in your facility. The following points should be reviewed in the context of your facility’s structure, and if needed, a change in your facility’s revenue cycle infrastructure and communication with payers should be implemented:

  • Provider organization’s contract starts, new rates are not loaded timely, and the payer does not reprocess incorrectly paid claims automatically.
  • New contract rates never loaded or were never made effective.
  • Linkage broken between individual providers and provider’s organization—causes the individual provider’s claims to pay at the wrong rate.
  • The connection between an organization’s physical location and the contract is broken, causing all payments for provider’s claims to pay at the wrong rate.

Underpayment Susceptibility: What Makes Your Facility More Susceptible?

Facilities that negotiate their rates with commercial payers have a high volume of commercial claims, large physician groups (or faculty groups/health systems/other IDNs), organizations with multiple physical locations (especially those that span multiple Medicare localities), and facilities that are part of growing health systems. In addition, these facilities are acquiring practices or groups and absorb them into existing tax IDs or contracts.

Recovery: How to Use Your Existing Data Effectively to Improve Financial Stability Now

There are many ways for a facility to approach underpayment recovery. For example, numerous facilities use a contract management vendor to manage underpayments in the vendor’s external application, or they will spell out contract terms in the physician billing system to create an underpayment management workflow starting here.

There are also other common ways that facilities will handle underpayment recovery. This usually encompasses hiring firms that say they make both hospital and physician recovery but end up spending most of their time and money managing the hospital’s recovery.

Underpayments Recovery Targets

Every provider organization is different. Results will vary because of this, the regional variance in national commercial payer market share, and that payer behavior can vary wildly, sometimes even within a payer that carries one name but has multiple systems running concurrently (ABBYY). When your facility begins its underpayment recovery program, there may be a lot of money upfront. However, on an annual, ongoing basis, a 1%-2% commercial insurance revenue lift is generally a realistic/attainable goal!

Solutions to Underpayments and Chronic Undercharging

Begin by thinking of underpayment and undercharging as a process. Then, form a workflow from your data to schedule and pay/write-off, Discovery & Mapping, Analysis & Optimization, and Predication & Forecasting can help curb these processes:

  • Discovery & Mapping- visibility into your business process to better understand process execution
  • Analysis & Optimization- full transparency and actionable insight for optimizing processes making decisions, and improving results
  • Prediction & Forecasting- optimize business operations through real-time monitoring to make predictive actions

It is realistic to achieve revenue improvement, build productive hours back to your business, add more projects to your facility per year, and attain better adoption/quicker value through these changes.


ABBYY Healthcare Automation Solutions Guide