The healthcare industry is constantly evolving, and keeping your organization financially stable amidst these changes is a top priority. For healthcare leaders and revenue cycle teams, this means staying on top of the latest trends in revenue cycle management (RCM). But beyond adopting new technologies and adapting to shifting patient expectations, there's a foundational element that can significantly impact your financial health: mastering payment analysis. Many healthcare organizations are, without even realizing it, leaving substantial revenue on the table due to underpayments.
You see, efficient RCM isn't just about managing claims and collecting payments; it's about meticulously tracking every transaction from start to finish to ensure you’re getting paid what you truly deserve. Underpayments often fly under the radar, especially when margins are already tight. But overlooking these discrepancies can lead to significant financial losses. In fact, understanding why and how to combat underpayments is a crucial roadmap for your organization to not just survive, but to truly thrive in a changing industry.
The Hidden Drain on Your Revenue Cycle: Why Underpayments Matter More Than Ever
In the complex world of healthcare, the journey of a patient’s encounter, from the moment they walk in the door to when their balance is settled, is a cascade of transactions. Each step, from patient registration to final payment, needs to flow smoothly for optimal revenue. The financial health of your organization hinges on the success of these transactions. That's where data comes in. It's the unsung hero that allows you to track these transactions, ensure processes are running well, and confirm you have the right people and software in place.
While metrics like “days in AR” or “denial rates” often get the spotlight, the reality of what you actually get paid – or rather, what you don’t get paid – is often overlooked. This is where payment analysis becomes vital. It’s about more than just the absence of a payment; it's about identifying "shortfalls, mistakes, or very weird trends" in your reimbursements, including underpayments and silent denials. With today's minimal margins, every dollar and every penny counts. Ignoring underpayments is akin to letting money drain right out of your pockets.
Deconstructing the Fundamentals: Contract Modeling vs. Payment Analysis
To truly master payment analysis, you first need to understand its critical partner: contract modeling. These two concepts, while distinct, work best together to give you leverage with payers and ensure the financial integrity of your organization.
Contract Modeling: Defining Your Expected Reimbursement
Contract modeling, or contract analysis, is essentially defining what you should be paid. Think of it like a price tag decoder for your healthcare services. Every payer contract outlines specific reimbursement rates, such as paying “110% of Medicare for CPT code 99214”. Ideally, these rates should be accurately loaded into your software system, and you trust that they are. However, relying solely on this trust isn't enough.
Payment Analysis: Uncovering the Reality of Received Payments
This is where payment analysis steps in. It's about determining what you actually got paid. It’s the process of verifying that the money you receive aligns with your expected reimbursement. Payment analysis helps you identify any discrepancies, shortfalls, or unusual trends that indicate you're not receiving the full amount owed.
The critical partnership between these two concepts is about validation. If you know what you’re supposed to be paid, and you’re actively validating that you are indeed receiving it, you gain significant leverage with your payers. This partnership provides real-time visibility into your revenue and equips you with the data needed to support the financial integrity of your organization, regardless of its size. As Stacy Calvaruso, a revenue cycle expert, emphasizes:
"I’m for it modeling and the payment analysis work best together because if you know what your surface to be paid and you’re validating that you’re getting it, then you actually have leverage with your payers. It gives you real-time visibility, but you also have the data to support your revenue integrity of your organization. No matter how big or how small it is, you need to understand your numbers or someone in your organization needs to understand the numbers. How much is going in? How much is coming out?"
Understanding these numbers is key to ensuring your cash flow is as high as possible.
Common Causes of Underpayments in Healthcare RCM
Underpayments aren't always glaring errors; they can be subtle and stem from various issues. Here are some common culprits:
Silent Denials and Downcoding
A silent denial occurs when a service is paid at a lower code than what was billed. For example, a 97155 service might be reimbursed as a 97153. While the difference might seem small for a single claim, across your entire organization, these add up to substantial "money left on the table".
Missing Modifiers and Bundled Services
Modifiers are crucial. If a necessary modifier is missed, ignored, or accidentally dropped from a claim, it can lead to uncollected revenue. Similarly, if services that should be paid separately are bundled together by the payer, you might not receive full reimbursement for each individual service. If these aren't properly evaluated during payment processing, you could miss out on appeals and rightful reimbursement.
Discrepancies in Allowed Amounts
This is a direct indicator of an underpayment. Your allowed amount by the payer should ideally match your contract rate. If, for instance, your contract rate for a 99214 CPT code is $125, but the payer's allowed amount is $123.10, they are not honoring the contract. This difference, even if small, represents an underpayment. While patient co-payments or processing fees can affect the cash received, the focus of payment analysis is on whether the allowed amount matches the contract rate.
The "Correct" Zero Payment
Not every zero payment is an underpayment. Sometimes, a zero payment is entirely correct. For example:
Secondary Payer Situations: If a primary payer paid more than a secondary payer would have allowed, the secondary payer might pay zero, and that would be correct.
Global Periods: For procedures with a "global period" (e.g., a laceration repair with a 10-day global period that includes follow-up visits), subsequent E&M codes submitted during that period might receive a zero payment because the follow-up care is already covered by the initial flat fee.
Practical Steps to Initiate and Sustain Payment Analysis
Starting a payment analysis doesn’t have to be overwhelming. You can begin with simple steps and then build up your process.
Starting Point: Your ERA and Fee Schedule
The best place to begin is by examining your Electronic Remittance Advice (ERA). Look at the allowed amount on the ERA. Then, compare this to your expected reimbursement or allowed amount as documented in your software system or fee schedule. If these don't match, it's a red flag that either your system isn't updated, or you're not getting paid correctly. If you don’t have access to your fee schedule, advocate for it and build a case for why payment review is crucial.
Identifying Triggers
Certain trends or events can trigger the need for a deeper dive into payment analysis:
Service Line Monitoring: For example, during flu season, if you’re giving out flu shots and doing flu tests, evaluate if the reimbursement for those specific services matches what you received in previous years or what other payers are providing. A gap from a specific payer is a clear trigger.
Low Unit Reimbursement: For a surgery center or community hospital, if reimbursement for a particular unit or service line is consistently low, it's time to investigate. This could be due to incorrect race increases in your charge master, payers stopping payments, new bundling rules, or uncommunicated policy changes.
Specific Denial Codes: Keep an eye on denials, especially those related to bundling or missing modifiers. A specific trigger mentioned is a “CO45 with a zero allowed amount”. This code usually signifies a contractual adjustment, and if it appears with a zero allowed amount, it warrants investigation.
Team Collaboration
Effective payment analysis is a team effort. The people best suited to identify these issues are those who are hands-on with payments and denials.
Payment Posters: These individuals are often the first to notice inconsistencies as they process payments. They are "very pivotal" in identifying payment trends.
Denials Teams: While their primary focus is appealing denials, they should also be analyzing why denials occur and sharing that information to get to the root cause.
Leadership: Leaders must take ownership, ask for regular reports, and use the data to drive action. This includes implementing a regular review of financial KPIs.
You might think you need advanced tech for this, but as the experts suggest, even a “good old Excel spreadsheet” can be effective. What matters is the mindset shift: realizing that an underpayment is a denial.
Recouping Lost Revenue: Strategies for Action
Once you’ve identified underpayments, the next step is to act and recover that lost revenue.
Prioritizing Recoverable Variances
You can't chase every penny. Focus your efforts on discrepancies that offer the most significant return. Prioritize "recoverable variances of $50 or more on CPTs or 10% of denial rates" on specific items. Just like with denials, you must prioritize. If an underpayment can recover $400 compared to a denial that only yields $25, the underpayment should take precedence.
Formal Payer Appeals
For significant underpayment issues – especially those involving hundreds or thousands of dollars, or more than 50 items – a formal appeal to the payer’s representative is necessary. This request should include:
A list of incorrectly reimbursed claims.
A copy of your contract, highlighting the relevant section.
Examples of incorrect reimbursements within the specified time period.
Many providers are unaware that they even have a dedicated payer representative or that this formal appeal option exists. It's worth digging out your contract and reviewing it for these options.
Navigating Timely Filing Limits
Payer contracts typically have timely filing limits for appeals (e.g., 60, 90, or 120 days). This is why regularly monitoring these trends, ideally quarterly, is crucial. However, even if you’ve passed the timely appeal process for a reimbursement, it doesn’t mean you can’t appeal a large error. Don't take an initial "no" as the final answer.
Success in Practice
These strategies aren't just theoretical. Real-world examples demonstrate their impact. One client, for instance, discovered a payer had been underpaying on one item and bundling another incorrectly. Through persistent follow-up and by getting the payer to look back three years, a hospital successfully recovered a check for $164,000. "Even $20,000 makes a difference," highlighting that every recovered penny counts.
This tedious work can be significantly streamlined with the right tools. While manual Excel spreadsheets work, automation offers efficiency. Tools that integrate with your clearinghouse or internal systems can scrape ERAs, compare them to loaded contracts, and flag any variances where the allowed amount doesn't match the expected reimbursement.
This is where advanced solutions like Magical's Agentic AI can revolutionize your revenue cycle. Agentic AI moves beyond traditional automation (RPA), which can be rigid and easily broken by unexpected changes. Instead, Agentic AI acts like a "self-driving car," understanding your goals and adapting to nuance, even course-correcting and identifying shortcuts. It leverages large language models (LLMs) and machine learning algorithms to process information, make human-like decisions, and continuously learn from experience.
For RCM, this means Agentic AI can:
Automate complex processes like claims processing, payment posting, and prior authorizations, even when they involve unstructured data and decision-making.
Interact seamlessly with multiple systems such as EHRs, billing systems, and payment gateways, ensuring smooth data flow.
Improve efficiency and accuracy, reducing manual effort and minimizing errors that lead to underpayments. Magical’s AI agents are designed to be resilient, adapting to changes in applications and handling edge cases automatically, ensuring your automations run reliably. Plus, Magical is built with security in mind, so there's zero risk of data breaches as it doesn't store keystrokes or patient data.
Think about the possibilities: Magical uses AI to observe your team’s workflows and automatically flag automation opportunities, helping you light up hidden inefficiencies. You can get started with automations in days, not months, boosting efficiency by over 50%. Imagine an AI workforce that works while you sleep, fully autonomous and scalable, making intelligent decisions within each automation.
Ready to see how Magical can help your organization recoup lost revenue and accelerate your revenue cycle? Book a demo today to learn how Agentic AI can make tasks disappear, like magic, by teleporting data between your tabs and automating complex workflows..
Conclusion: Treat Underpayments Like the Denials They Are
The core takeaway is simple: a payment variance is a denial. You didn't get paid what you were supposed to get paid. In today's landscape of minimal margins and fierce competition for reimbursement, ensuring your cash flow is optimized is paramount.
To put this mindset into action and sustain your efforts, establish Key Performance Indicators (KPIs) for payment analysis. Stacy Calvaruso suggests:
"A payment analysis should be done every quarter. If we have a high level of bundled items, we evaluate bundled items. Those are some key things that you can put in that both the team accountable engage everybody some focus and not just this wide open statement of, yeah, we’re going to do a payment analysis and check everything. No, let’s give you a specific targeted analysis to start with and let’s see where it goes."
A good rule of thumb is to evaluate your top five CPT codes, top five departments, top five revenue generators, and top five losses every quarter. This targeted approach helps focus your efforts and ensures accountability.
Prioritizing underpayments with the same urgency as denials can significantly impact your financial health. If you’re short-staffed or in a smaller organization, even doing a payment analysis once a year is better than never. Consider seeking additional help or leveraging technology to kickstart the process. Many providers have contracts that haven't been reviewed in decades; taking a look can reveal opportunities for higher reimbursement or better terms, like reimbursement escalators based on the economy.
Remember, you have leverage. You serve a community, have a reputation, and provide essential services that payers’ members choose. Don't be afraid to advocate for yourselves and fight for every penny you deserve.
By embracing a proactive approach, investing in innovation, and making smart, data-driven decisions, revenue cycle leaders can steer their organizations through challenging times. This not only supports the financial well-being of the facility but also ensures providers receive the optimal revenue for the invaluable work they do.
Don't let underpayments silently drain your revenue. With the right mindset, processes, and tools like Magical's Agentic AI, which streamlines data entry and automates complex RCM workflows, you can take control, accelerate your revenue, and ultimately deliver even better patient care.
Ready to transform your revenue cycle and ensure every penny you’re owed makes it back into your organization? Book a free demo with Magical to see how our Agentic AI employees can help you automate revenue cycle workflows and start recouping lost revenue today.
